Federal Solar Tax Credit Guide for Homeowners (2024)
As we enter 2024, the renewable energy landscape continues to evolve, presenting homeowners with increasingly attractive opportunities to invest in solar energy. The Federal Solar Tax Credit, a significant incentive for residential solar installations, remains a pivotal factor for many considering this green leap. This comprehensive guide aims to unravel the nuances of the 2024 Federal Solar Tax Credit 2024, clarifying its workings, eligibility, and the steps homeowners must take to claim this benefit.
Key Takeaways
| The Federal Solar Tax Credit for 2024 allows homeowners to deduct 30% of the cost of installing a solar system. |
| Eligibility extends to U.S. homeowners, including those in condos or cooperative housing, who own their solar systems outright. Leasing disqualifies you from the credit. |
| To claim the credit, homeowners must file IRS Form 5695 with their federal tax return detailing their solar system expenses. |
| Homeowners may also qualify for state and local incentives, such as tax credits, net metering benefits, and sales tax exemptions. |
| The Inflation Reduction Act of 2022 sustains the 30% credit rate until 2032 before it decreases. |
What Is the 2024 Federal Solar Tax Credit, And How Does It Work?
The federal solar investment tax credit is a tax credit that can be utilized when filing your federal income taxes. Unlike a tax deduction or refund, the ITC directly reduces the amount you owe in taxes. Currently, the credit is set at 30% of the total cost of your solar photovoltaic (PV) system.
U.S. homeowners, condo owners, or cooperative housing corporation members who own a solar panel system are eligible for the federal solar tax credit. However, leasing solar panels means you cannot claim the credit.
When your system becomes operational, you can claim the credit in the tax year. For example, if your system is installed in December 2024 but you do not receive permission to operate from your utility until January 2025, you can only claim the credit for 2025.
The federal solar tax credit can only be claimed once. If the credit’s value exceeds the taxes owed, the remaining amount can be carried over to offset future tax liabilities.
When you invest in a solar energy system valued at $19,000, you will receive a 30% ($5,700) reduction on your federal taxes. If your tax owing is less than $5,700, the leftover credit will be applied to your federal tax the next year – you will not receive the remaining credit in cash.
In accordance with the Inflation Reduction Act of 2022, the ITC will decrease to 26% by 2033 and further reduce to 22% by 2034. It is set to expire entirely in 2035 unless Congress decides to extend it.
How To Claim the Solar Tax Credit
When claiming the federal tax credit, you can include the solar tax credit in your yearly federal tax filing with the IRS. Your solar company will give you the necessary paperwork and guidance on how to apply for the credit. Usually, trustworthy installers will include this paperwork in the estimate or agreement you receive before the installation so you know the credit amount from the start. Below are the key steps to take in claiming the credit.
- Download IRS Form 5695 to include it in your tax filing.
- In Part I of the tax form, determine the credit by listing your solar system expenses as “qualified solar electric property costs” on line 1, based on your solar contract.
- Finalize the calculations on lines 6a and 6b. Calculate any limitations on tax liability on line 14 using the IRS’s Residential Energy Efficient Property Credit Limit Worksheet.
- Complete the calculations on lines 15 and 16, and input the accurate amount from line 15 on your Schedule 3 (Form 1040), line 5.
Do I Qualify for the Federal Tax Credit?
The Office of Energy Efficiency & Renewable Energy (EERE) outlines the following guidelines for qualifying for the federal solar tax credit:
| 1. Installation date: | Eligibility is for U.S. taxpayers who have implemented a solar energy system from Jan. 1, 2006, through Dec. 31, 2034. |
| 2. Initial installation requirement: | The solar initiative must be original. The credit only applies to the first installation of solar equipment. It is not to the relocation or reuse of pre-existing systems. |
| 3. Property Location: | The solar setup must be at either your main home or a secondary residence within the U.S. It applies to off-site community solar projects. However, the electricity produced is at a limit and offsets your household's electricity use. |
| 4. System ownership: | The solar photovoltaic (PV) system must be under your ownership. The credit is unavailable if you are leasing or have agreed to buy electricity from the system. This includes arrangements like a solar power purchase agreement (PPA). |
| 5. Residence type: | The Investment Tax Credit (ITC) covers various dwellings. Moreover, including traditional homes, mobile homes, houseboats, condos, and cooperative apartments. |
Residential Solar Tax Credit or Residential Clean Energy Credit
The Residential Clean Energy Credit offers a 30% deduction on the expenses of purchasing new, qualified clean energy equipment for your residence, which was set up anywhere between 2022 and 2032. The percentage of the credit decreases to 26% for property installed in 2033 and 22% for property installed in 2034. If you have made energy-efficient upgrades to your home in the United States, you may be eligible to receive this credit. This credit is not refundable, meaning the amount of credit cannot exceed the tax you owe. Any leftover credit can be applied to reduce future tax payments. Do not count interest paid, including loan fees, while calculating the credit. There is no limit on the amount you can claim annually or over your lifetime, except for fuel cell property. You can claim this credit each year for eligible property installations until it starts phasing out in 2033.
Types of Incentives and Rebates
State and Local Solar Incentives
State or local governments provide tax credits, net metering, and tax exemptions as some of the most beneficial solar incentives. These can be combined with the 30% federal solar tax credit to enhance your savings. To discover available rebates and state tax credits in your area, you can utilize the Database of State Incentives for Renewables & Efficiency (DSIRE) using your ZIP code.
Certain states offer a tax credit at the state level that can be used with the federal solar tax credit. These states include Arizona, Colorado, Hawaii, Massachusetts, Maryland, and New Mexico. At present, 41 states mandate net metering. Residents in these states can sell surplus electricity from their solar panels to the utility provider in exchange for credits on their bills. With certain states, such as Idaho and Texas. They do not enforce net metering statewide, numerous state utility companies still provide this option.
Net Metering
Net energy metering (NEM) is a billing system that allows solar system owners to receive credits from their utility provider for the excess solar energy they produce and feed back into the grid. These credits can then be used to offset the cost of electricity purchased from the grid. At times when solar production is low, such as at night. NEM and similar programs allow homeowners to save money on energy costs by utilizing solar power.
Most states use NEM 2.0, which provides a 1:1 credit, but in April 2023, California transitioned to NEM 3.0. Customers will now qualify for net billing instead of the usual net metering system. While similar to net metering in some respects, net billing does have its differences. Additionally, any excess energy generated by solar users will be exchanged with the utility at set export credit rates. In the new NEM 3.0 program, these rates will be determined based on the avoided-cost rate per hour, representing the utility’s expenses to generate or purchase the equivalent power from a power plant.
Tax Exemptions
Most states provide property tax exemptions for solar equipment, which means you do not have to pay taxes on the increase in value of your property from installing solar panels. Additionally, many states offer exemptions from sales tax for solar equipment. Your solar installer can assist you in completing and submitting any necessary paperwork for these tax exemptions.
Garrett Nilsen, the deputy director of the Solar Energy Technologies Office at the U.S. Department of Energy, advises homeowners to research and understand the various solar incentives available at both the federal and local levels before deciding to go solar. A knowledgeable local installer should be able to help you take advantage of state and local incentives and the Investment Tax Credit (ITC).
Inflation Tax Credit
The Inflation Reduction Act (IRA) is the most significant legislation ever passed in our nation’s history to support clean energy and combat climate change. Over 70% of the funding is estimated to come from tax incentives. This law will boost investment and economic growth, provide new job opportunities with fair wages and support programs like Registered Apprenticeships in the energy sector, and ultimately decrease expenses for American households as we transition to a cleaner energy economy.
By merging efforts to address climate change with the creation of quality jobs, the IRA’s unparalleled investments in fighting the climate crisis will enhance job standards in clean energy fields and encourage the development of pathways for workforce training in these industries, which will ultimately help elevate workers to the middle class.
The U.S. Department of Treasury and IRS have released guidance and a proposed regulation regarding tax incentives for clean energy projects through IRA, which are essential for generating well-paying employment opportunities. Taxpayers will access higher tax credits under the IRA if they guarantee workers receive prevailing wages and use registered apprentices to construct clean energy projects.
The Department of Labor’s Wage and Hour Division and Office of Apprenticeship will back the prevailing wage and apprenticeship requirements of the IRA.
There are also other incentives you can check out:
Can You Use The Federal Tax Credit With a State Tax Credit?
If you reside in a state that provides its own solar tax incentive, you can ultimately receive federal and state tax incentives. For instance, if your state offers a tax incentive equivalent to 10% of your solar system expenses, you can still claim the 30% federal tax incentive.
Please be aware that you must pay federal taxes based on your state tax incentive amount.
You must consult with a tax professional or accountant. This is to fully understand the implications and benefits of utilizing both federal and state tax credits for solar installation. Additionally, keep thorough records of all expenses and documentation related to your solar system installation to properly claim all available tax credits.
Is the Solar Tax Credit a one-time thing?
The Solar Tax Credit is not a one-time benefit but a federal tax credit that can be on federal income taxes to cover a portion of the expenses in a solar PV system the taxpayer has paid for. To qualify for the credit, the system must be fully installed within the same tax year.
Previously set at 26% for installations in 2020 and 2021, the tax credit increased to 30% between 2022 and 2032 following a congressional extension of the Investment Tax Credit (ITC). Subsequently, the credit will decrease to 26% for systems installed in 2033 and 22% for systems installed in 2034. The tax credit is set to expire starting in 2035 unless renewed by Congress.
There is no limit to the amount claimed through this tax credit. Individuals may be eligible for the credit if their solar PV system was installed between January 1, 2017, and December 31, 2034, and is situated at their residence within the United States. Additionally, ownership of the solar PV system is a requirement for eligibility.
Conclusion
The 2024 Federal Solar Tax Credit is a testament to the ongoing commitment to transition towards a cleaner energy future. It makes solar energy more accessible to a broader range of homeowners. Moroever, it also underscores the importance of individual action in the collective fight against climate change. With the clock ticking towards its eventual reduction and expiration, now is a prime time for homeowners to assess their eligibility. Furthermore, to understand the claiming process and capitalize on this opportunity to invest in solar energy. Thereby reducing their carbon footprint and enjoying significant savings on energy costs.
Ready To Go Solar?
If you’re contemplating solar installation, 2024 presents a golden opportunity to maximize your investment through the Federal Solar Tax Credit. Don’t let this chance slip by. Consult with a tax professional to navigate the specifics of your eligibility and claiming process. Act now to secure your place in a cleaner, more sustainable future while reaping the financial benefits of solar energy.
Frequently Asked Questions (FAQ)
Can I claim the federal solar tax credit for my solar installation?
Yes, you can claim the credit if you have installed a residential solar system on your property and meet the eligibility criteria set by the government.
What is the investment tax credit for solar?
The investment tax credit for solar is a federal incentive that allows homeowners to deduct a certain percentage of the cost of a solar energy system from their federal tax liability.
How does the solar tax credit work on my tax bill?
The solar tax credit is applied as a credit against your total tax liability, reducing the amount of taxes you owe. It can help lower the overall cost of your solar installation.
What are some of the solar incentives available for homeowners?
Homeowners can take advantage of various incentives, such as the federal tax credit for residential solar, state tax credits, and sales tax exemptions to make solar power more affordable.
When is the best time to install solar panels to claim the solar tax credit?
To claim the solar tax credit, you must have completed the installation of your solar panels and put them into service by the end of the tax year for which you are claiming the credit.
