Solar Tax Credit: What It Is and How It Works In 2023
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The U.S. government offers a solar tax credit that can help you recoup up to 30% of the cost of installing a solar power system.
The U.S. Department of Energy says the tax savings on an average solar installation can reach $7,500.
The residential clean energy credit also covers other types of renewable energy projects undertaken by homeowners, subject to certain guidelines.
To claim the solar tax credit, you’ll have to fill out IRS Form 5695.
You can claim the tax credit if you receive other clean energy incentives for the same project, although this might result in a smaller credit.
If you installed solar panels, you may be in line for a tax break when you file your returns. The U.S. government offers a solar tax credit that can reach up to 30% of the cost of installing a system that uses the sun to power your home.
What is the federal solar tax credit?
The federal solar tax credit is a form of investment tax credit, or ITC. That basically means it’s an incentive meant to spur investment in something the government wants to support. In 2022, President Joe Biden signed the Inflation Reduction Act, which extended solar tax credits through 2034.
Although the program is often referred to simply as the solar tax credit, its official name is the residential clean energy credit. The credit can cover expenses such as equipment and installation, but it doesn’t apply to structural work made solely to support panels. In some cases, the solar tax credit can be combined with state incentives and utility-funded programs that support clean energy.
The amount available for solar tax credits can vary, depending on what you spent on the project and when you completed it. But these solar incentives should be available in some form to homeowners who place a qualifying system in service anytime between 2017 and 2034.
Solar tax credit 2022 and 2023
The solar panel tax credit for 2022 (taxes filed in 2023), is 30%. It remains at 30% for tax year 2023 (filed in 2024).
How does the solar tax credit work?
The solar tax credit allows you to use a part of the cost of a solar power system to reduce the income taxes you owe. The U.S. Department of Energy says the tax savings on an average solar installation can reach $7,500.
The actual percentage of the cost you can claim varies based on the year your system was activated:
System in service
Is the solar tax credit refundable?
No. The solar tax credit can save you money on your tax bill, but the amount of your credit can’t exceed the total amount you owe. That’s because the credit is “nonrefundable,” in tax speak. Put simply, if the credit reduces your overall tax bill below zero, the IRS is not going to cut you a check for the difference. You can, however, “carry forward” any unused portion of your tax credit and use it to reduce your taxes in the following year.
The solar tax credit is a powerful tax tool for those who can claim it, because it is a credit rather than a deduction. That means the amount for which you’re eligible can be knocked off of your taxes due. That can mean a much larger savings than a deduction, which requires that you itemize and only recoups a portion of your expenses by reducing your taxable income.
» Learn more: Try our free tax calculator
What projects are eligible for solar tax credits?
The residential clean energy credit also covers other types of renewable energy projects undertaken by homeowners. They are:
Solar water heaters.
Small wind energy.
Fuel cell projects.
Geothermal heat pumps.
How do you qualify for the federal solar tax credit?
Not every project in these categories will qualify for federal aid, but there are some general guidelines that can help you get a sense for what to expect.
The project has to be in your U.S. home. The IRS defines this as somewhere you lived in the year for which you’re claiming the credit, and it can include “a house, houseboat, mobile home, cooperative apartment, condominium, and a manufactured home.” For solar, wind and geothermal projects, the property in question doesn’t have to be your primary residence.
You have to own the system. The costs of a leased system on your home aren’t part of the credit program.
You must have placed the project in service in 2017 or later. Projects activated before the energy credit program began won’t help you with your taxes now.
Not everything is included. Installing a solar energy project can be complicated, and not every cost is covered by the program. For instance, it includes installation, but not work done that supports the system but serves only a structural function.
How do you claim the solar tax credit?
To claim the solar tax credit when you file a tax return, you’ll have to fill out IRS Form 5695, which covers residential energy projects.
You’ll need some information about your tax situation that you can gather from other documents, including Form 1040. You’ll also have to supply details about the cost of your energy project as well as a certification from the equipment manufacturer that the products qualify for the credit.
You can also use Form 5695 to claim tax credits for other energy improvements, such as new windows and insulation. Follow the instructions on the form to see which tax credits you might be able to claim.
Does the solar tax credit work with other incentives?
You can claim the tax credit if you receive other clean energy incentives for the same project, but that additional financial assistance might shrink the overall cost of your system for tax purposes. Because the federal tax credit is calculated as a percentage of that cost, you could wind up with a smaller credit.
Solar panel incentives by state
State-level solar incentives vary widely, so it’s wise to read up on your state’s rules before making any decisions. If you’re not sure where to start, N.C. State University’s NC Clean Energy Technology Center offers a nationwide directory of available programs.
Generally speaking, getting a state tax break or rebate won’t limit your ability to get solar credits from the IRS.
Utility-based clean energy incentives
On the other hand, incentives paid out by your utility provider may not help to the same degree (though they could still save you money).
According to the IRS, the overall cost used to calculate your credit has to take into account any help you got from a public utility, unless you counted that incentive as income for federal tax purposes.
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