Solar Tax Credit For The Federal Government

A Complete Guide To 2022’s Solar Tax Credit For The Federal Government

Federal solar tax credits, which are now known as “The Clean Energy Credit”, are the largest solar incentive currently available. This tax incentive will cover 30 percent of the costs of installing solar panels which can provide the homeowner with thousands in savings on the tax bill. In certain cases, it is possible to completely reduce your tax bill!

The majority of Americans can benefit from this tax incentive for solar however there are some important things you should be aware of about the process to determine what is eligible and who can make use of it prior to making the change to solar.

The solar tax credit for the federal government in an enumeration:

  • Solar panels installed prior to 2033 can qualify for tax credits equal to 30% of the total cost to install solar panels.
  • A solar panel costing $20,000 would be eligible for tax credits equal to $6,000 of the amount you owe on federal income tax.
  • The solar systems that are installed by 2033 will be eligible for an additional tax credit of 26 and systems that are installed in 2034 will receive an additional 22% tax credit prior to when the tax credit expires completely in 2035.
  • To be eligible for tax credits, you must have solar panels, earn an income tax-deductible and the solar panels must be placed on your primary or second residence.
  • Battery storage systems also are eligible for the federal tax credit of 30% credit if they are charged exclusively using solar energy. In 2023, battery installations that are standalone will also be eligible for tax credits.

Solar Tax Credit For The Federal Government

What is the Federal Solar Tax Credit? functions

Before we go to the tax credits for solar energy in particular first, let’s review the fundamentals of how tax credits work. If you have a debt of $3,000 in federal taxes, but qualify for a tax credit worth 1,000, the tax obligation is reduced to $2,000. It’s pretty simple.

Solar tax credits operate similarly to the tax credit for solar panels. The amount of tax credit you get is determined by the proportion of “qualifying costs” of installing solar panels. In 2022 The solar tax credit amounts to 30 percent of the installation cost. So, if your solar panel installation costs you $20k and you qualify to receive the tax deduction of $6,000.

Solar panels installed in 2033 will be eligible for an amount of tax credit equivalent to up to 26 percent of the installation costs. In 2034 this tax credit is expected to amount to 22 percent. In 2035 the solar tax credit for federal taxpayers will be completely canceled.

So a solar system that was installed in 2022 will receive the credit amount of $6,000, whereas systems installed at the same amount in 2033 will only get $5,200.

What if I owe more than the tax credit amount?

Solar tax credits are not refundable which means that when the solar tax credit you receive is greater than the amount you owe in tax you won’t receive any kind of payment or refund. But that doesn’t mean you can’t receive the full amount. Any remaining value is carried forward and added to your tax bill in the following year.

Let’s say that your solar system is installed, and you receive a tax credit of $6,000 however, there’s only $4,000 of federal tax on income. This leaves you with a tax credit of $2,000 which will be used for the next tax year. Tax credits can be carried over for up to five years.

What should I do if I’m receiving an income tax refund?

Also, there’s the possibility that your taxes were withheld from your paycheck and you’ve already paid taxes. In certain instances, there could be a lot that has been taken from your pay, and the federal government is owed an amount of money.

If that’s the situation then the solar tax credit for federal taxpayers can be added to the tax refund check. But only that is equal to the amount you owe. If you owe $8,000 in taxes, and $10,000 was removed from your paycheck then you’d receive a tax refund of $2,000 from the federal government.

If in the same year you had installed solar and were awarded a $9,000 tax credit, you’d receive an additional $8,000 on the refund check, for an overall tax refund of $10,000. The remainder of the tax credit would carry forward into the following year.

Solar Tax Credit For The Federal Government

How can you be eligible for the federal 30% solar tax credit

As we mentioned earlier, the majority of Americans are eligible to receive the tax credits offered by Congress. However, there are certain situations where you may not be qualified. The eligibility criteria are in the following order:

  • The system is required to be installed between 2022 and 2032.
  • You have to be the owner of the system that is powered by solar panels.
  • You must earn a tax-deductible income.
  • The solar panel must be installed at the primary or secondary residence.
  • It is required to be claimed in the original installation for the undertaking.
Ownership of your solar system: If you go solar with the option of a solar lease or a solar PPA and you do not qualify for an exemption from the solar tax credits as you're not the owner of your solar installation. If you buy solar with a solar loan you are still able to benefit from the tax credit as you own the solar system.

What are the costs that are eligible to receive Federal solar credits?

The majority, if not all, of the expenses related to installing solar panels can be claimed to be covered under Federal solar tax credits. Costs that qualify are:

  • equipment: Cost of solar panel and racking, as well as wiring and inverters.
  • Labor for contractors: The cost of the labor involved in preparation, installation, and planning and the cost of permits costs and inspections.
  • Taxes on sales: Any sales tax that is a result of the above costs is paid with the tax credit.

Technically speaking, the tax credit isn’t limited to solar panels. Other clean energy systems may also benefit from the tax credit which includes electric water heaters and thermal fuel cells, geothermal heat pumps,s and even tiny wind power systems!

Do our battery storage systems qualify for the Federal solar tax credit?

Yes, Energy storage will be eligible for the tax of 30% credit. Thanks to the passing of the Inflation Reduction Act, battery systems that pair with solar panels by 2022 will receive the full 30% tax credit.

On average, batteries for residential use are priced between $10,000 to $15,000 to install. Therefore, you should expect tax credits of $3000 and $4500 for energy storage. When the batteries are fitted by solar, the cost of the battery will be included in the other solar installation expenses. If a battery that is standalone is installed without solar panels, you’ll be eligible for tax credits depending on the cost of battery installation.

Beginning in 2023, standalone batteries with no solar power will be eligible to avail of the tax credits offered by federal law. Batteries installed after 2023 should be at a minimum of three kilowatts (kWh) to be considered large. The majority of home storage batteries are about 10 kWh and therefore you won’t need to think about the minimum power requirements.

How does the solar tax credit work with state, local, and utility incentives?

The federal tax credit isn’t the only incentive available to homeowners who switch to solar. You could be eligible for other incentives offered by your state government, or even your utility company. The type of incentive could potentially impact how much your federal solar tax credit will be worth.

The utility incentive

In the majority of cases If you’re receiving the benefit of a rebate from your utility company the amount of the utility refund will subtract from the total expenses prior to your federal tax credits being determined. This reduces the number of tax credits you receive.

This is an example: You install a solar system at $20,000. You receive an amount of $1,000 through your energy provider. In lieu of tax credits based on the initial price of $20,000 however, it will instead be calculated based on the cost after deducting the rebate from your utility company. In this case, it’s $19,000.

The following formula to determine the value of your tax credit is worth following an incentive to use the utility:

30% x (Total system cost – Utility rebate amount) = Federal tax credit value

Tax credits and incentives from the state

In contrast to utility incentives, government incentives from state governments typically do not require deduction prior to that federal tax credit can be determined.

If you had a $20,000 system and received a $1000 state government rebate and a solar tax credit will be calculated based on the initial cost of $20,000. In this instance, this means the tax credit will be equal to 30% of the $20,000, which is an amount of federal tax credit that is $6,000. This means you’d receive a total of $7,700 in incentives.

The same goes for the tax incentive programs offered by states. However, receiving the state tax credit could increase your tax-deductible income on federal tax returns as you’ll have fewer state income taxes to be able to deduct. At present, 10 states provide tax credits for state taxes that include Arizona, Massachusetts, and New Mexico.

The ideal moment to claim the solar tax credit is right now

Solar Tax Credit For The Federal Government

There are approximately 10 years to make use of the entire 30% tax credit. However, just because you are able to put off 10 years does not mean you must. It’s generally best to make an investment earlier rather than later. Installing solar as early as you can allows you to begin saving money sooner, which means you’ll be able to stop paying expensive electric bills and put your money towards items that are important to you.

In addition, going solar will never be a better investment option than it is now. Other solar incentives across the nation could end prior to the federal tax credit being due. Consider net meters an incentive that will pay you the entire cost of electricity for solar energy that you provide to the grid, for an instance. Electricity providers across the nation are shifting towards net metering, and are paying solar customers less to use solar power.

It is recommended to get solar panels before net meters and utility rebates begin to disappear so that you can get the highest solar savings you can get.


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Thomas Harder

Is an environmental and renewable energy specialist with over 10 years of expertise within the renewable and solar industry. With over a decade of experience in various organizations within the field He runs Mysolarperks as a passion-driven project that promotes sustainable renewable energy ideas and products.
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