Everything you need to know about solar tax credits in 2021

Updated

The federal solar tax credit, also known as the solar Investment Tax Credit (ITC), is arguably the most important solar incentive for residential solar projects in 2021. However, for many homeowners, it isn’t the only renewable energy tax credit available.

This guide explains both federal and state solar tax credits in 2021 that you may be eligible for. We will also show you how to calculate the amount of credit you are entitled to if you are lucky enough to live in an area that offers state-based solar incentives. 

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    Estimate the value of all solar tax credits and incentives you are eligible for

    What is the federal solar investment tax credit?

    The federal solar tax credit is the most popular financial incentive for homeowners looking to go solar. It reduces the cost of a solar system by allowing you to deduct a portion of the solar installation costs from your federal income taxes.

    Right now, the solar tax credit is worth 26% of the cost of your solar installation, including equipment and labor costs. Based on the current average cost of solar panels, a typical homeowner can expect a tax credit of between $4,000 and $6,000. The actual amount you receive will vary, due to a number of factors (like the size of your system), but we’ll get into that later. 

    You get paid this credit when you do your taxes for the year in which the system was installed, usually in April of the following year. So, if your system cost $21,000 to install, you would receive a tax credit equal to $5,460, reducing the total cost of the system to around $15,540 - not bad!

    In this video, solar expert Andy Sendy explains how the solar tax credit works, and how you can claim the full value of this valuable incentive.

    What is the future of the federal solar tax credit?

    The savings you get from the solar tax credit are great, but they won’t be available forever. 
     
    The 26% tax credit is available until the end of 2022. In 2023, the credit amount steps down to 22%, before completely expiring in 2024
     
    The good news is that 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. 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 stepdown schedule

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

    How do I estimate the dollar value of the federal solar tax credit?

    While it’s easy to give you the rate of the federal solar tax credit, figuring out the actual dollar value that it’ll save you is a little more difficult. You have to know the size of the solar system and solar prices in your area for that size system in order to truly figure out how much the tax credit will save you. 

    Fortunately, we have one of the most accurate solar panel cost and savings calculators that will do just that for you using advanced machine learning technology.  

    From just your address and the amount spent on your last electricity bill, we can calculate:

    • How many solar panels you need to power your home
    • The estimated cost of the installation based on the most up-to-date solar prices in your area
    • The dollar value of what the tax credit would be for your home

    Through the calculator, you can also choose to connect with one or more local solar companies, get more detailed information on other state and local solar incentives you might qualify for, and find out how long it will take for your solar panel costs to break even.  

    How many solar panels do you need to eliminate your electric bill?

    Which states offer a state solar tax credit in 2021?

    There are 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. 

    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 solar tax credit on the net cost.

    The following table displays the states that currently offer solar incentives and/or rebates:

    Table 1. Solar tax credits by state
    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 want a closer look at the tax credits in your state as well as your eligibility, check out our 2021 state-by-state Solar Incentive Guides

    Who is 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, so you are not eligible for the ITC if you go solar with a solar PPA or solar lease

    Basically, this means if you owe federal income taxes and you own the solar panels, you will qualify for the tax credit

    Keep in mind, the ITC is a “non-refundable” tax credit, so you can’t take a credit that exceeds the amount that you owe in taxes. You can, however, claim the credit over more than one tax year and carry any leftover amount forward to the next year through your federal tax return. 

    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 costs.

    Are solar batteries covered by the federal 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.

    How do you claim the federal solar tax credit?

    To claim the residential ITC, you need to complete an additional form when you file your income taxes: Form 5696. The instructions for Form 5696 are fairly easy to follow and include a worksheet to help you figure out how much of the credit you can claim this year. 

    Here are the two main documents you need for 2021 to claim the solar tax credit: 

    Learn more: Step-by-Step Guide to Claiming the ITC 

    While there is hope that the ITC will be extended under the current administration’s goal of increasing renewable energy use, your safest bet is to install solar panels now so you can guarantee savings. Even if the income tax credit is extended, it might not be as high as 26%. 

    Now is the time to install solar panels and start reducing your energy costs. Requesting quotes from multiple local solar installers is the best way to ensure you get the fairest price. Your installer will help guide you with local, state, and federal solar incentives, as well. 

    Find out how much you can save annually by switching to solar

    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

    Andrew Sendy

    Home Solar Journalist

    Andy is deeply concerned about climate change but is also concerned about cost of living pressures on American families. He advocates for solar energy and solar battery storage only to the extent that they make financial sense for homeowners. He is not affiliated with any particular solar company in the United States.

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