Solar Federal Tax Credit: How Much Can You Claim?

The solar federal tax credit is a major incentive for photovoltaic systems in the US. Homeowners and companies who install solar panel systems can claim 30% of project costs as a tax deduction on their next IRS declaration. For example, if you invest $23,600 in an 8-kilowatt home solar system, you can claim a federal tax credit of $7,080.

The federal tax credit is known by many other names, but they all refer to the same incentive:

• Investment Tax Credit (ITC)
• Solar Investment Tax Credit
• Renewable Energy Investment Tax Credit
• Clean Energy Investment Tax Credit

The solar tax credit was introduced by the Energy Policy Act of 2005, and it came into effect in 2006. The incentive has been extended several times, and it was reduced to 26% in 2020. However, the Inflation Reduction Act restored the 30% incentive rate in 2022. The ITC was also scheduled to end in 2024, but thanks to the Act it will remain available until December 2034.

The ITC benefits solar installations of all sizes in the US, and the incentive amount has no upper limit. According to the Solar Energy Industries Association (SEIA), the US solar industry has grown by more than 20,000% since 2006 thanks to the ITC.

NOTE: This article is informative and not intended as tax advice. We strongly recommend getting in touch with a Certified Public Accountant (CPA) to ensure that your IRS forms and other tax documents are filled correctly. You can claim the solar tax credit on your own, but this is only recommended if you completely understand the process and the IRS forms.

Calculating the Federal Tax Credit for a Home Solar System

Since the solar tax credit is 30% of system costs, larger arrays get higher incentives. If your project becomes more expensive because you purchase high-end solar panels and inverters, the cost increase is also eligible for the tax credit.

According to cost data gathered by the National Renewable Energy Laboratory (NREL) and EnergySage, home solar systems have an average cost of $2.95 per watt in the US. The following table shows the typical prices of solar power systems ranging from 4 to 10 kW, and the federal tax credits you can expect in each case.

The solar tax credit is claimed on the IRS filing that corresponds to the installation year of your photovoltaic system. If your tax payment is low, you are not forced to use up the entire tax credit in a single year. As a quick example, assume you installed a 5-kW system for $14,750 and are now eligible for a tax credit of $4,425.

• If you owe $8,000 in taxes, you only pay $3,575 thanks to the tax credit.
• On the other hand, if you only owe $3,000, you can use part of the tax credit and keep the remaining $1,425 for next year.

Note that the solar ITC is nonrefundable, which means it cannot be claimed in cash. You can use it over several years if your tax burden is small, but the IRS will not give you a check.

The 30% federal tax credit is available for all eligible solar systems installed in 2022, even those installed before the Inflation Reduction Act. However, solar installations from 2020 and 2021 get a 26% tax credit, since that was the applicable incentive rate for those two years.

Which Solar PV Systems Are Eligible for the Federal Tax Credit?

In general, solar power systems must meet a few conditions to qualify for the federal tax credit:

1) You must own the solar power system. You cannot claim the federal tax credit if you are leasing a photovoltaic system, or getting electricity from onsite solar panels through a power purchase agreement. In both cases, the solar system is owned by the provider and they are entitled to the ITC.

You can also claim the federal tax credit if you purchase part of an off-site community solar project. However, you don’t get the tax credit if you participate in a community solar system as a subscriber, without a direct ownership share.

2) The solar energy system must be installed on a primary or secondary residence. You can only claim the tax credit when installing solar panels on a property you use directly, and this applies for primary residences and vacation homes. Solar power systems installed on rental homes and other investment properties are not eligible for the ITC.

Your solar panel system must also be a permanent installation to qualify for the tax credit. This means that portable PV systems are not eligible, even if you use them in your primary residence or a vacation home. Off-grid solar systems are eligible if they are permanently installed on a home owned by you.

Solar panels can be installed anywhere on your property, as long as you use them as a power source for your residence. In other words, you are not forced to install solar panels directly on your roof: ground-mount installations and solar carports also qualify for the ITC.

3) Your solar PV system must be new or being used for the first time. If you purchase a home with solar panels that have already been used by the previous owner, you don’t get the tax credit. The same applies if you remove solar panels and install them in another home; since the panels are considered used property, the second installation is not eligible for the tax credit.

Combining the Solar Federal Tax Credit with Local Incentives

The Clean Energy Investment Tax Credit can be combined with other solar incentives from local government and utility companies. These can be classified into four broad categories:

• Tax credits and exemptions from the local government.
• Cash rebates from the local government.
• Cash rebates from electric utility companies.
• Performance-based incentives, which are based on the electricity output achieved by your solar energy system.

The federal solar tax credit is not affected by government tax incentives, government rebates and performance-based incentives. However, the calculation procedure changes if you get a solar rebate from a local utility company.

• You must subtract the solar rebate first.
• The 30% federal tax credit is calculated using the net cost of your solar system after rebates (not the full price).

As a quick example, assume you install a home solar system for $15,000, which means you get a federal tax credit of $4,500. If you get a $2,000 rebate from a state government agency, your tax credit stays the same. However, if you get a $2,000 rebate from a utility company, you must recalculate the tax credit according to the following procedure:

1) Subtract the rebate from the total cost of your solar PV system.

• Net cost = $15,000 – $2,000 = $13,000

2) Calculate the 30% federal tax credit based on the net cost.

• Federal tax credit = $13,000 x 30% = $3,900

If the $2,000 rebate comes from a government program, the total incentive for the home solar system in this example is $6,500. However, if the rebate comes from a utility company, the federal tax credit is reduced and the total incentive is $5,900.

Do Solar Battery Systems Qualify for the Federal Tax Credit?

Solar panels can reduce your power bills for decades, but they cannot provide electricity on demand like a diesel generator. If you want a 24/7 solar power source, you must combine your photovoltaic array with a battery. You can charge the battery during the day, and the stored energy can be used at any time:

• At night when your solar panels are no longer productive.
• During cloudy weather when solar generation is drastically reduced.
• In case of a blackout.

Before the Inflation Reduction Act, battery systems were only eligible for the ITC if 100% of their charge came from solar panels. In other words, you were not allowed to recharge the battery with electricity from the grid – even at night or during cloudy weather.

The Act removed this limitation in August 2022, and the change came into effect in January 2023. All home batteries with a storage capacity of at least 3 kilowatt-hours (kWh) are now eligible for the federal tax credit, regardless of their electricity source.

For example, if you install a 6-kW solar system for $17,700 and a 5-kW / 10-kWh home battery for $12,000, the full cost of $29,700 is eligible for the federal tax credit. In this case, you can deduct $8,910 from your next IRS filing.

When Does the Clean Energy Investment Tax Credit End?

The solar federal tax credit has been extended several times since its introduction in 2006. The incentive rate was reduced from 30% to 26% in 2022, and a further reduction to 22% was planned for 2023. The solar ITC for homeowners would originally end on December 31, 2023, and only a 10% incentive would remain available for businesses.

The Inflation Reduction Act introduced multiple tax incentives for clean energy technologies in August 2022, while improving existing programs. The Solar Investment Tax Credit had several major changes:

• The federal tax credit was raised to 30% again.
• The 30% incentive rate will remain available through 2032.
• The tax credit is reduced to 26% in 2033, 22% in 2034, and it ends in 2035.

The 30% tax credit was also made available for all renewable energy technologies. Before the Inflation Reduction Act, the benefit was exclusively for solar photovoltaic systems and batteries charged with solar energy.