A buyers guide to the 26% federal solar tax credit in 2021

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The solar industry has grown a lot in the last decade and the solar tax credit played a huge role in solar going mainstream. The solar investment tax credit (ITC) covers 26% of the cost to install solar panels.

Whether you are looking to calculate the dollar value of the tax credit, or simply want to learn more about this valuable incentive, our 2021 buyers guide is perfect for you. 

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    How does the solar tax credit work in 2021?

    The federal solar tax credit is the most popular financial incentive for homeowners looking to go solar. The 26% tax credit is a dollar-for-dollar reduction of the income tax you owe. Many homeowners think they are not eligible for the solar tax credit because they don’t have an additional tax bill at the end of the year. 

    This is not the case, the federal solar tax credit can get back a refund of the taxes you have already paid out of your weekly or fortnightly paycheck. Also, if you don’t have enough tax liability to claim the credit in that year, you can roll over the rest of your credits to future years.

    Was the federal solar tax credit extended?

    Yes, the solar investment tax credit was extended at the 26% rate for an additional 2 years. It was originally going to drop to 22% in 2021, but now with the new legislation being passed, it will remain at the 26% rate until the end of 2022.

    This is great news for homeowners thinking about solar, as the tax credit was voted as the single most important financial incentive in the largest home solar survey.

    When does the federal solar tax credit expire?

    The federal solar tax credit is set to expire at the end of 2023. There is hope that the tax credit may be extended once again. The Biden Administration has plans to include a 10-year extension of the tax credit in future legislation. But, there’s no guarantee that this will be approved by Congress and it may be at a lower rate.

    Because of that, our best advice is to try and add solar panels as soon as possible so you’re guaranteed to get the 26% credit.

    itc step down table

    The best time to go solar is now because the 26% ITC will decrease to 22% in 2023 before becoming unavailable for residential solar systems installed in 2024 and beyond. 

    How do I claim the solar panel tax credit?

    To claim the solar investment tax credit in 2021, you will need to complete form 5695 when you lodge your tax return. On part 1 of the form, you will calculate how much you are eligible for, and then you enter that amount on your form 1040.

    We have a step-by-step guide on how to claim the solar tax credit by one of our solar experts here at SolarReviews.com. If you need help claiming the tax credit use this article to help you through the process.

    How to claim the federal solar tax credit step by step.

    Am I eligible for the federal solar tax credit?

    Any taxpayer who pays for a solar panel installation can claim the solar tax credit, as long as they have tax liability in the year of installation. You must be the owner of the solar panel system in order to qualify for the tax credit, meaning if you lease your system you are not eligible.

    When leasing a system, the solar company will get the tax credit instead of you. We recommend you buy your system outright if you can afford to. The money you save in the long run is more. Leasing also makes it harder to sell your home, as buyers don't want to take over a 25-year lease.

    Are solar batteries covered by the solar investment tax credit?

    The Internal Revenue Service (IRS) specifies that battery installations for which “all energy that is used to charge the battery can be effectively assured to come from the Solar Energy System” are eligible for the full solar tax credit.  

    In other words, yes, solar batteries like the Tesla Powerwall and the LG Chem are eligible for the solar tax credit if they are charged by solar energy more than 75% of the time. 

    This means that if you install a battery with a new solar system, you will save 26% on the total combined cost.

    Can you claim the solar tax credit on an investment property that you own and rent out?

    Yes, you can claim the tax credit on an investment property that you own and rent. 

    However, it can’t technically be claimed under the residential solar tax credit. There are actually two federal solar tax credits: one for homeowners and one for business owners, and in this case, your property would qualify under the “business” tax credit. 

    They have slight differences in their step-down schedules and are under different tax code sections, but currently, they are both worth 26% of the cost.

    Solar Tax Credit Calculator:

    It is easy to give you the rate of the solar tax credit. But it is much harder to give you the dollar value for your specific home. Luckily SolarReviews.com has developed one of the most accurate solar calculators. Using data from local solar installs in your area we can give you a very accurate cost guide for your specific home. 

    It will show you the dollar value of the federal solar tax credit and include any state tax credits if eligible. This gives homeowners who use our calculator the opportunity to figure out if solar is worth it for their home, before talking to solar companies.

    Calculate the dollar value of the tax credit

    Is there a state tax credit for solar panels?

    Here is a table of the 10 states that offer state solar tax incentives or rebates that you can use in addition to the federal tax credit. These tax credits can provide an additional $1,000 to $6,000 in savings. 

    State solar tax credits

    State

    Maximum incentive value

    Arizona

    $1,000

    Hawaii

    $2,250

    Idaho

    $5,000

    Iowa

    $5,000

    Massachusetts

    $1,000

    Montana

    $1,000

    New Mexico

    $6,000

    New York

    $5,000

    South Carolina

    $3,500

    Utah

    $1,600

    If you are eligible for a state tax credit, you deduct its value from the total cost of the system, and then claim the 26% federal tax credit on the net cost. When using our solar calculator, it will automatically adjust the dollar value of the tax credit when eligible for state tax credits.

    Calculate how much solar will cost after the tax credit

    Key takeaways

    • The solar ITC is a federal tax credit equal to 26% of the costs of a solar installation completed before 2023.
    • The tax credit will decrease to 22% for installations completed in 2023 and disappear for residential installations completed in 2024 and beyond.
    • Homeowners who pay taxes can qualify for the tax credit when they install solar panels on a home they own, even if it isn’t their main home.
    • Solar batteries such as the Tesla Powerwall and LG Chem are eligible for the solar tax credit, as well.
     - Author of Solar Reviews

    Oliver Sendy

    SolarReviews Blog Author

    Oliver is very passionate about the solar industry. He loves that solar is great for the environment but is also an excellent investment. He has gained hands-on experience working for a solar installation company, which informs his writing about solar.

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