How much will the 26% federal solar tax credit actually save you?
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 on your home or business before the end of 2022, you will receive a tax credit that is equal to 26% of the cost of your solar installation (including equipment and labor). 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.
Based on the average cost of a solar panel system - about $18,000 - the 26% tax credit is currently worth $4,680.
What is the future for the solar tax credit?
The solar tax credit is set at 26% for 2021 and 2022, giving you about one and a half years to claim the tax credit at the 26% rate. In 2023, it goes down to 22%, and it is set to expire altogether in 2024 unless new legislation is passed by Congress.
In March, the Biden Administration announced that they will be putting forward legislation for a 10-year extension of the credit, beginning at the current rate but stepping down over that period. The proposal will need to be approved by Congress before it can take effect.
How do I estimate the dollar value of the federal solar investment tax credit?
While it is easy to tell you the rate of the federal solar tax credit, telling you the actual dollar value it will save you on a system is a little more difficult. It requires us to first calculate what size of solar system your home will need, and then consider local solar prices on that size of system.
Fortunately, we have a solar panel cost and savings calculator that will do exactly this for you. From just your address and the amount spent on your last month's electricity bill, it can calculate how many solar panels you need to power your home, and then determine the estimated costs based on current solar system prices.
The results section of the solar panel cost and savings calculator shows the dollar value of the tax credit, as well as a lot of other information about payback period. In the calculator's results section, you will be able to see the dollar value of the tax credit, along with other useful information about savings, financing, and more.
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The history of the federal solar tax credit
Technically, there are two different solar tax credits: one for residential installations and one for commercial installations. In most cases people just refer to both of these as the “solar tax credit” or the ITC. This is probably because currently the rates are the same for both.
First enacted in 2005 as part of the Energy Policy Act of 2005, the solar tax credit began as a tax credit of 30% of the cost to install a solar panel system.
The tax credit was arranged to expire in 2007, but it’s popularity and success at expanding the solar industry led it to being extended in 2008.
In 2015, the solar tax credit was extended yet again. With this extension, Congress implemented a schedule for the tax credit to “step down” over time. Here’s how the schedule is laid out:
- 2016 - 2019: The tax credit remained equal to 30% of the cost of the solar installation for home and business owners.
- 2020 - 2022: The tax credit fell to 26% of the cost of the solar installation for home and business owners.
- 2023: The tax credit falls to 22% of the cost of the solar installation for home and business owners.
- 2024 and beyond: The federal tax credit expires for residential solar installations. Commercial solar owners can qualify for a tax credit equal to 10% of the cost of the solar system.
How does the federal solar tax credit work?
Until 2023, the solar tax credit is equal to 26 percent of the cost to install a solar system.
For example, a 6 kilowatt (kW) residential solar panel installation in California costs about $16,080. The credit for that system would be 26% of $16,080, or $4,180.
The solar tax credit brings the total cost of installing this system down to just $11,899!
Until 2023, the federal solar tax credit will equal 26% of the cost of installing a solar system before stepping down to 22% in 2023 and expiring completely for residential installations in 2024. After 2023, 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 their home or business they own can claim the solar tax credit, as long as they have tax liability in the year of installation. You must also be the owner of the solar panel system in order to qualify for the solar tax credit. If you choose to get solar through a solar PPA or a solar lease.
Basically, this means if you owe income taxes during the same year of your installation, and you are the owner of the solar panels you qualify for the tax credit.
Keep in mind, 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.
For more information on what is eligible for the federal tax credit, check out our ITC frequently asked questions guide.
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 2021:
Learn more: Step-by-step guide to claiming the ITC
The federal solar tax credit makes solar more affordable
Federal tax incentives like the solar tax credit make solar energy cheaper and more profitable for the average homeowner.
It’s important to note that in order to get the full 26% tax credit, your system must be “placed into service” by the end of 2022. The IRS doesn’t define what “place into service” means, but it’s safe to assume that it’s when your system is fully interconnected and your utility has granted you permission to operate.
This means that going solar now is the best way to guarantee that you’ll get the highest savings possible. Then you aren’t cutting it too close with the federal solar tax credit deadlines.
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% 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.