What Is the Solar Tax Credit and How Does It Work?

When filing your taxes this year, you might be eligible for a tax break if you put in solar panels in 2022. The cost of installing a system that uses the sun to power your house can be offset by the U.S. government by up to 30%.

What Is the Government Tax Credit for Solar Energy?

Investment tax credits, or ITCs, are what the government solar tax credit is. This indicates that it is a financial reward designed to encourage investment in a cause that the government favors. The Inflation Reduction Act, approved by President Joe Biden in 2022, extended solar tax credits through 2034.

The program’s formal name is the residential clean energy credit, even though it is frequently referred to as the solar tax credit. The credit can be used to offset costs for installation and equipment. But it does not extend to structural work done purely to support panels. In some circumstances, state incentives and utility-funded clean energy initiatives can be combined with the solar tax credit.

Depending on how much you spent and when the job was finished, different amounts of solar tax credits may be available. However, homeowners who install a qualifying system between 2017 and 2034 should have access to these solar benefits in some capacity.

The 2022 Solar Tax Rebate

For 2022 (taxes submitted in 2023), the solar panel tax credit is 30%.

With the help of the solar tax credit, you can use a portion of the expense of a solar power system to lower your tax liability. According to the U.S. Department of Energy, tax benefits from a typical solar installation can total $7,500.

Do the Solar Tax Benefits Result in a Refund?

No. The solar tax credit can reduce your tax bill, but it cannot be greater than the total sum you still owe. That’s because the benefit is “nonrefundable.” Simply put, the IRS will not issue you a check for the difference. Especially if the credit lowers your total tax bill below zero. Any unused part of your tax credit can, however, be “carried forward” and used to lower your taxes the following year.

Because it is a credit rather than a deduction, the solar tax credit is an effective financial tool for those who qualify. This implies that the sum for which you are qualified may be deducted from the taxes you owe. That could result in much greater savings than a deduction. Which calls for itemizing and only allows you to recover a part of your costs by lowering your taxable income.

What Types of Initiatives Qualify for Tax Credits?

Other kinds of renewable energy projects that homeowners perform are also covered by the residential clean energy credit. As follows:

  • Solar-powered energy.
  • Solar water warmer.
  • Tiny breeze power.
  • Biomass energy.
  • Fuel cell initiatives.
  • Generators for geothermal heat.

Although not all of the projects in these categories will be eligible for federal funding, some basic guidelines can give you an idea of what to anticipate.

  • Your U.S. home is where the endeavor must be located.
  • The property in issue need not be your primary home for geothermal, wind, or solar projects.
  • You must be the system’s owner. Your home’s leased system expenses are not covered by the credit program.
  • The initiative had to be put into use in 2017 or later. You won’t receive any tax relief for projects that were initiated before the start of the energy credit program.

Not every detail is covered. It can be difficult to install a solar energy project. And the program does not always cover the associated costs. For instance, it involves installation but excludes work that only serves to support the system structurally.

How Should the Tax Rebate Be Claimed?

You must complete IRS Form 5695, which is for residential energy projects, to claim the solar tax credit when you submit your taxes.

You’ll require some details regarding your tax situation, which you can find in other papers, such as Form 1040. The expense of your energy project must also be disclosed, and the equipment manufacturer must certify that the products are eligible for the credit.

Does the Tax Credit Operate in Conjunction With Other Offers?

If you receive other renewable energy incentives for the same project, you are still eligible for the tax credit, but the total cost of your system for tax purposes may decrease as a result of the extra financial support. You might receive a smaller credit because the federal tax credit is determined as a proportion of that expense.

If you have any more questions, give our experts at Your Part Time Accountant a call.