The federal solar tax credit: all your questions answered
The federal solar tax credit, also known as the Solar Investment Tax Credit, or ITC, is the single most important solar incentive available in the United States. If you install solar panels before the end of 2020, you will receive a tax credit that is equal to 26 percent of the cost of your solar installation.
The tax credit is applied to your federal income taxes and can greatly reduce, or even eliminate, what you owe! But, there are certain rules and guidelines that govern who can claim the credit.
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The article below contains information about who can claim the solar tax credit, how it works, and what factors might affect your eligibility.
The history of the federal solar tax credit
The term “solar tax credit” actually refers to two separate things. First is the “Residential Energy Efficient Property Credit,” and second is the “Business Solar Investment Tax Credit,” but differentiating between the two is complicated. For simplicity, people in the solar industry just say “solar tax credit” or ITC.
First enacted in 2005 as part of the Energy Policy Act of 2005, the solar tax credit began as a tax credit of 30 percent of the cost to install a solar panel system with a maximum credit of $2,000. In 2008, the ITC was reauthorized and the cap was lifted. In 2015, the ITC was extended, and scheduled to “step down” over time.
There’s never been a better time to install solar on your home, as you will want to take advantage of the maximum amount of the solar tax credit.
How does the federal solar tax credit work?
Throughout 2020, the solar tax credit is equal to 26 percent of the cost to install a solar system, with no maximum credit amount. For example, an average-sized residential installation of solar panels in California costs about $17,000. The credit for that system would be 26% of $17,000, or $4,420.
For the remainder of 2020, the federal solar tax credit will equal 26% of the cost of installing a solar system before stepping down to 22% in 2021 and expiring completely for residential installations in 2022. After 2021, businesses can receive a 10% tax credit for installing solar panels.
Whether you can claim the full amount of the credit depends on a few factors.
Who is eligible for the federal solar tax credit?
Anyone who pays for a solar panel installation on a home or business they own can claim the solar tax credit, as long as they have tax liability in the year of installation. What this means is, you have to owe taxes during the same year as the installation in order to qualify for the solar tax credit.
You can’t take a credit larger than the amount of taxes you owe, because the ITC is a “non-refundable” tax credit. You can, however, claim the credit over more than one year, and carry any leftover amount forward to the next year.
It’s important to note that when it comes to the residential ITC, the IRS says your system has to be “placed into service” by the end of the year to qualify for that year’s tax credit, but they don’t define “placed into service.” We’d say that’s when your system is fully interconnected and permission to operate has been granted by your utility company.
If your solar panels are turned on and sending electricity to the grid on December 31st, you’re good, but otherwise, talk to a tax expert and be cautious.
How do you claim the federal solar tax credit?
To claim the residential credit, complete Form 5695 along with Form 1040 when you file your income taxes. The instructions for Form 5695 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 links to the two main documents for tax year 2019:
Other frequently asked questions about the federal solar tax credit
The following questions are the ones we hear most often from homeowners who are considering solar. Keep in mind that we are not tax experts and cannot give tax advice.
The answers below are correct to the best of our knowledge, but your best bet is always to contact an expert to be sure of the answers to your questions before proceeding.
Is there an income limit for the solar tax credit?
There is no maximum income limit to be eligible for the ITC, but you must make enough income to owe taxes during the year. In order to claim the entire amount of the credit, your tax liability has to be equal to the amount of your credit, after all other credits have been calculated.
Can you claim the federal solar tax credit more than once?
Yes. If you’d like to add solar panels to an existing installation or add a new installation to a home that already has solar panels, you can claim a tax credit based on the additional cost. Talk with a tax expert about the details, like whether you can claim the cost of replacing your original solar inverter with one that can handle the additional panels.
Can someone else claim your solar tax credit if you can’t?
In order to claim the credit, you must own the home where the panels are installed. If you jointly own a home with another person and they have income while you don’t, they can claim the full amount of the tax credit if they paid for the solar panels.
Can two owners of a home each claim a portion of the tax credit?
Yes. If you jointly own a home with someone else you’re not filing jointly with, you can each claim the tax credit based on the percentage of costs you actually paid. For example, a parent and a child who are both listed as owners on a home’s title can each claim their portion of the tax credit.
Can you claim a solar tax credit in the same year you claim the EV tax credit?
You can claim both the solar and EV credits in the same year, but you have to have at least enough tax liability to claim the EV credit. For example, if your EV credit would be $7,500 and your residential energy efficient property credit would be $5,000, you’d need at least $12,500 in tax liability to claim both. If your tax liability is less than the combined amount of both credits, you’ll carry the excess solar credit amount forward to the next year.
Do rental properties qualify for the solar tax credit?
The IRS says you can claim the ITC for a home you own and use as rental property, but you must also live in the home. If you live in the home only part time, you must use a percentage of the solar costs equal to the percentage of the year you live in the home to calculate the credit.
Do you have to use the tax credit to pay off your solar loan?
Many solar companies offer loans with a special low monthly payment to customers who will pay an amount equal to their tax credit toward the principal of the loan within the first 12-18 months after loan origination.
This is known as a “balloon payment,” and while it can be beneficial to keep monthly costs down, some people choose to keep their tax credit money and instead pay a larger monthly payment. We are not aware of any solar financing company that requires a balloon payment as a condition for taking the loan.
Can you claim the solar tax credit if you install solar panels yourself?
Yes, DIY solar installations are eligible for the federal investment tax credit, but only costs for equipment, paid labor, permitting and administration are eligible. You cannot claim your own labor as a cost to install solar if you did the work yourself.
Can you claim the credit for solar pool heating?
There is no federal tax credit for solar pool heating systems. In fact, the IRS states plainly that “Costs allocable to a swimming pool (or) hot tub...don't qualify for the residential energy efficient property credit.”
Does energy storage qualify for the tax credit?
Home solar batteries qualify for the ITC under certain conditions. IRS guidance number 201809003 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.
The federal solar tax credit makes solar more attainable
Federal tax incentives like the solar tax credit make solar energy cheaper and more profitable for the average homeowner. We recommend taking advantage of these credits quickly to get the most out of your investment.
Check out reviews of solar installers in your area and request a personalized assessment of your property and energy options.
- The solar ITC is a federal tax credit equal to 26 percent of the costs of a solar installation completed in 2020
- 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
- The tax credit will decrease to 22 percent for installations completed in 2021 and disappear for residential installations completed after 2021
Author: 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.