Federal Solar Tax Credit: What It Is and How to Use It (2022 Guide)

The solar investment tax credit (ITC), or federal solar tax credit, is one of the most significant incentives for homeowners looking to switch to solar energy. The federal government’s tax credit helps offset the initial cost of a solar system and allows you to claim 26% of the total cost of your solar installation on your federal taxes. 

We have researched and analyzed the top solar installation companies in the United States. In doing so, we examined solar incentives, including tax credits, rebates, and net-metering benefits. This guide will help you understand how the federal solar tax credit helps make your solar installation more cost-efficient, as well as whether or not you qualify. 

The federal residential solar energy credit is a tax credit that you may claim on your federal income taxes. It is not a tax deduction that reduces your taxable income. Instead, a tax credit reduces the amount of money you owe in taxes. Your solar power system must be installed during the tax year and generate electricity for a home located in the United States. This credit applies to the cost of a solar photovoltaic (PV) system. There is no maximum amount that you can claim.

The United States Congress passed an extension of the Energy Policy Act of 2005’s ITC provision, which provides a 26% tax credit for systems installed in 2020 to 2022. The credit decreases to 22% for systems installed in 2023 and expires in 2024 unless Congress renews it.

According to the Office of Energy Efficiency & Renewable Energy (EERE), the following criteria determines your eligibility to claim the federal solar tax credit: 

• Date of installation: Your solar PV system is installed between January 1, 2006, and December 31, 2023.
• Original installation: The solar PV system is new or being used for the first time. The credit can be claimed only on the original installation of solar equipment.
• Location: The solar PV system is located at your primary residence or secondary home in the United States. It can also be for an off-site community solar project if the electricity generated is credited against your home’s electricity consumption and does not exceed it. 
• Ownership: You own the solar PV system. You are not leasing or in an agreement to purchase electricity generated by the system, such as a solar power purchase agreement (PPA). 

As long as you are a U.S. homeowner and the solar panel system installed is for a residential location in the United States, you can claim the federal solar tax credit. The tax credit rolls over year after year if the taxes you owe are less than the credit you earn. 

For example, if you have a solar system installed for $23,000, the 26% tax credit saves you $5,980 on your federal tax return the same year the system is activated.

According to the EERE, you can expense the following items through the federal solar tax credit: 

• Panels: Panels can be solar PV panels or PV cells. 
• Labor: Labor costs include on-site preparation, assembly, or original installation. These include the permitting fees, inspection costs, and developer fees. 
• Additional equipment: The credit covers other components of the solar system, such as balance-of-system equipment, including wiring, inverters, and mounting equipment. 
• Batteries: It covers any storage devices charged exclusively by your solar PV panels. This claim works even if the storage is activated in a subsequent tax year to when the solar energy system was installed. Storage devices are still subject to the installation date requirement, though. 
• Sales tax: Any sales taxes on these eligible expenses is also covered. 

You claim the solar tax incentive as part of your annual federal tax return with the Internal Revenue Service (IRS). But, first, check with your solar provider to receive the proper documentation and instructions on exactly how to claim the ITC as part of your installation. We have listed some of the most critical steps in the process below:

1. Download IRS Form 5695 as part of your tax return. 
2. Calculate the credit on Part I of the tax form. You file your solar system as “qualified solar electric property costs.” On line 1, enter your overall project costs as written in your solar contract, then complete the calculations on lines 6a and 6b. 
3. On line 14, calculate any tax liability limitations using the IRS’s Residential Energy Efficient Property Credit Limit Worksheet. Then, complete the calculations on lines 15 and 16.
4. Be sure to enter the figure from line 15 on your Schedule 3 (Form 1040), line 5.

We recommend that you consult a tax expert, as well as your solar provider, to ensure you are correctly claiming the federal solar tax. As a reminder, the tax credit only offsets the taxes you owe on your return. If the taxes you owe are less than the credit you earn, the credit will roll over year after year. 

You may also file any sales and property tax exemptions that may be available in your state in addition to the ITC. Enter your zip code on the Database of State Incentives for Renewables & Efficiency to see what other rebates and state tax credits you can receive. 

Overall, we suggest you work with a tax professional for tax advice. We also encourage you to utilize any resources provided by the IRS and the EERE to help claim the solar ITC. The federal solar tax credit is an excellent way to get money back on your solar panel installation, as long as you are claiming it correctly.

If you are still searching for a reputable and trustworthy solar installation company, we recommend using our tool below to compare solar providers in your zip code.