Federal Solar Incentives

Recently, the United States Government passed “The Inflation Reduction Act of 2022” which aims to combat rising inflation rates by promoting sustainable and environmentally friendly practices. By offering tax incentives and subsidies for renewable energy production and use, the act encourages individuals and businesses to reduce their carbon footprint, thereby helping to decrease emissions and promote a healthier environment.

With the Inflation Reduction Act of 2022, there will be a 30% solar tax credit until the end of 2032. In 2033 the tax credit will decrease to 26%, and then it decreases again to 22% for systems installed in 2034. In order to be eligible for this tax credit, your solar panel system must have been installed between January 1, 2017, and December 31, 2034. The credit only applies to the “original installation” of the solar equipment so it must be new or being used for the first time, and you must own the solar system either by purchasing with cash or through financing.

Key Points of the Federal Solar Tax Credit

  • The federal solar tax credit is known as the “residential clean energy credit” in the Inflation Reduction Act of 2022.
  • If you do not use all the tax credits your first year, you can roll them over to the following year. 
  • The solar system tax credit aligns with when your system started servicing and generating electricity for your home. 
  • You must purchase, not lease the solar system and it must be deemed operational by a city inspector.
  • As of January 1, 2023, battery storage can be claimed on the tax credit as part of the solar system, or as its own solar electric property. 
  • The solar tax credit can be claimed on IRS Form 5695.
  • There is no maximum amount that can be claimed.
  • This tax credit is non-refundable.

What a Non-Refundable Tax Credit Means

A tax credit is a dollar-for-dollar reduction in the amount of taxes owed. For example, if a taxpayer owes $1,000 in taxes and is eligible for a $500 tax credit, the taxpayer’s tax liability will be reduced to $500. Tax credits can be either refundable or non-refundable. Refundable tax credits can be claimed even if the taxpayer owes no taxes, and the taxpayer will receive a refund for the amount of the credit. Non-refundable tax credits can only be claimed if the taxpayer owes taxes, and the taxpayer will only receive a refund for the amount of the credit up to the amount of taxes owed. In this case, the Federal Tax Credit for solar can only be applied if you owe taxes to the federal government, otherwise it will be rolled over into the next year.

How a Tax Credit Differs From a Tax Rebate

A tax credit and a tax rebate are both forms of government incentives that can reduce the tax liability of individuals or businesses. However, they work differently and have different impacts on a taxpayer’s tax bill. A tax rebate is a payment made to a taxpayer after taxes have been filed and processed. A tax rebate is usually a percentage of the taxpayer’s total taxes owed and is intended to provide a financial benefit to the taxpayer. For example, if a taxpayer owes $1,000 in taxes and is eligible for a $100 tax rebate, the taxpayer will receive a check for $100 after taxes have been processed.
In summary, a tax credit is a direct reduction in the amount of taxes owed, while a tax rebate is a payment made after taxes have been processed. Both tax credits and tax rebates can provide financial benefits to taxpayers, but they work in different ways.

Other Solar Incentives That Could Impact The Federal Tax Credit

Utility Company Rebates

Generally, subsidies from utility providers won’t be reported on income tax returns. Therefore, if you’ve opted to install solar panels and have received a rebate for it, that amount must be deducted from the system cost before calculating your federal tax credit. Though net metering payments are not exempt from taxes in most states, they shouldn’t impact the eligibility of your tax credit.

State Government Rebates

State government rebates will likely not influence or diminish the amount of your federal tax credits.

State Tax Credits

While obtaining a state tax credit for your residential solar system will not reduce the amount of federal tax credits you receive, it can have an indirect impact on your taxes. Since you’ll be able to deduct less in state income tax from reported taxable income when claiming this credit, ultimately there could be an increase in what needs to be paid at the federal level.

Renewable Energy Payments

Selling renewable energy certificates can result in taxable income, which will be added to your gross income and not reduce your tax credit.