Tax Day has never been so shiny: Federal Solar Tax Credit in 2023

Tax Day – the income tax filing deadline, which typically falls on April 15 – isn't the most awaited day of the year. Not for those who decided to go solar, though. If you bought and had your solar PV system installed last year, you're likely to pay no tax at all. This wonder is called Solar Tax Credit.

What is the Federal Solar Tax Credit?

The Solar Investment Tax Credit (ITC) was first introduced in the USA by the Energy Policy Act of 2005. To encourage Americans to use solar power, Congress proposed a solar panel tax credit worth 30% of the total solar installation cost (parts and labor), which basically meant a dollar-for-dollar reduction in the amount of income tax owed by the homeowner. For example, if the solar PV system cost cost $15,000, you could claim a $4,500 federal tax credit back then, which would reduce your federal income taxes due by $4,500 respectively. Easy!.

Thanks to its popularity and significant contribution to renewable energy development, the ITC has been extended multiple times since it was enacted in 2006. The US solar industry has grown by more than 10,000% to reach 71.3 gigawatts of solar installed capacity (as of the end of 2019), creating nearly a quarter-million new jobs and investing billions of dollars in the economy of the country. Despite the tremendous success of the Federal Solar Tax Credit, its value started decreasing dramatically in 2019.

All good things must come to an end?

Riding on the wave of its success, Congress extended the solar ITC program till 2024. Starting in 2020, the value of the rebate would fall for 5 years before finally ending for residential solar and permanently dropping to 10% for commercial solar in 2024. But in August 2022 Joe Biden signed the Climate bill, and the ITC program was revitalized.

As solar continues to go mainstream, the industry has less need for support. Thanks to the continuous advancement of solar technologies and materials, going solar has already become much more affordable. According to the Renewable Power Generation Costs in 2019 report by IRENA, the costs for electricity from utility-scale solar photovoltaics (PV) fell 82% between 2010 and 2019. This explains why at the end of 2019 the ITC value dropped 4% for both residential and commercial solar applications.

How does the Federal Solar Tax Credit in 2022 work?

Despite such a depressing forecast, you still have a little time to benefit from the federal incentive. Let's have a look at how the ITC works in 2022.

This year a 26% credit is applicable to both residential and commercial systems, which were placed in service during the tax year (2021). In fact, there is no bright-line test from the IRS on what constitutes 'placed in service', but the IRS has equated it with completed installation.

There is no maximum amount that can be claimed, so don't worry if your tax liability is lower than your solar rebate – the credit can rollover to the next year. For example, if your solar system costs $20,000, you are eligible for $5,200 (26% of the total gross cost) in tax credit. If your annual tax liability is $4,000, you won't pay any taxes for 2021 at all and will owe $1,200 less the following year ($2,800). If your tax liability for 2021 is $6,000, you will get a full credit and will owe just $800.

The more you spend, the more you save

Solar PV system isn't only about buying solar panels. It comprises a range of auxiliary equipment and services, which will make you constantly dip into your pocket. All these expenses can be claimed, including:
•  Solar equipment
•  Freight shipping costs
•  Solar consulting fees
•  Professional installer fees
•  Electrician fees
•  Engineer fees
•  Tools bought or rented
• Wiring, screws, bolts, nails, etc.
•  Equipment purchased or rented (scaffolding or a man-lift, for example)
•  Permitting fees
•  Permitting service costs

As you can see, there are a lot of things to take into account. So, do keep all your receipts from the very beginning of your solar installation project. Like any tax incentive, the Federal Solar Tax Credit requires a paper trail. Don't worry, this paper work won't be in vain: the more solar-related expenses you can prove, the larger your credit will be.

Owner? Here's your tax credit

Generally, the majority of solar system owners are eligible to claim the ITC. The key word here is owner: It is crucial that you own the solar PV system (i.e. you purchased it with cash or through financing but you are neither leasing nor are in an arrangement to purchase electricity produced by a system you do not own).

Here are some other facts regarding the Federal Tax Credit eligibility:
•  The solar PV system must be located at your primary or secondary residence in the USA.
•  You must have any tax liability.
•  The solar PV system must be new or used for the first time. The credit can only be claimed on the 'original installation' of the solar equipment.
•  Solar system for an RV or boat must be accepted by the IRS as a second home.
•  Remember, every individual's tax situation is different. Consult a tax professional to make sure you're eligible to claim the Federal Tax Credit.

How to get Solar Tax Credit

Once you've installed your solar PV system, collected all the receipts and confirmed you're eligible, it's time to do some paperwork. There are just two forms to fill in:

Follow our guide on claiming Solar Tax Credit and start planning your best Tax Day ever. Because you deserve it.

Tatiana Ivanova

Author

With a degree in Linguistics, Tatiana uses her vast experience in technical translation to deliver complicated concepts in simple words. She joined the company in 2020 as a contributing writer to become the person to influence Blog’s development.

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