Solar Tax Credit

How the New Solar Tax Credit in the Inflation Reduction Act Works

Amid rising electricity and home energy costs across the country, the Inflation Reduction Act makes installing solar panels and storage batteries a much more attractive investment for many homeowners than it was even just a couple of years ago.

With the new legislation’s Residential Clean Energy Credit, you are able to subtract 30 percent of the cost of installing solar heating, electricity generation, and other solar home products from your federal taxes. The credit is a reboot of an older, less valuable federal tax credit and will be available to taxpayers for more than a decade. Meaning homeowners considering solar installations have plenty of time to consider their options.

Here are the key details.

What Is the Solar Tax Credit?

If you install solar energy equipment in your residence any time this year through the end of 2032, you are entitled to a nonrefundable credit off your federal income taxes, equal to 30 percent of eligible expenses. There’s no dollar limit on those expenses; you’re entitled to that 30 percent tax break whether you spend $20,000 or more than $100,000 on costs associated with a residential solar system.

What Expenses Are Eligible for the Solar Tax Credit?

According to the Department of Energy and the new law’s language, the same expenses covered under the old law are eligible for this new solar tax credit:

  • Solar photovoltaic (PV) panels.
  • PV cells used to power an attic fan (but not the fan itself).
  • Contractor labor for onsite preparation, assembly, or original installation.
  • Permitting fees, inspection costs, and developer fees.
  • All equipment needed to get the solar system running, including wiring, inverters, and mounting equipment.
  • Storage batteries. (You can claim the tax credit for these even if you buy and install them a year or more after you install the solar system.)
  • Sales taxes on eligible expenses.

In a change from the old law, eligible battery storage units that you install must store at least 3 kilowatts.

How Will the Solar Tax Credit Save You Money?

The credit lowers your federal taxes. For example: if you spend $24,000 on a system, you can subtract 30 percent of that, or $7,200, from your federal taxes. (You must take the credit for the year the installation is completed.) If, say, you owe $7,000 in taxes before the credit, a $7,200 credit would drop what you owe to zero. You can’t get a tax refund for the $200 remainder. However, you can carry forward that remainder into a later tax year.

You will save having lower electricity bills too. How much you will save depends on a number of factors, including how much electricity your household uses, the size of your solar system and the amount of sunlight it gets, and local electricity rates. Real estate experts say a purchased solar system—as opposed to a leased one—can raise the value of your home when you sell.

How Long Does the Solar Tax Credit Last?

The 30 percent credit lasts until Dec. 31, 2032. It drops to 26 percent in 2033, then 22 percent in 2034, and disappears in 2035, unless Congress continues it. (The new law supersedes an older law, set to expire in 2024, that would have provided a 26 percent credit for solar installations this year, and 22 percent in 2023.)

Who Can Get the Solar Tax Credit?

It’s available to all taxpayers for their primary or secondary residence located in the U.S. Taxpayers of any income level can take advantage of it. You can use it whether you itemize your taxes or take the standard deduction.

Keep in mind that the solar tax credit is available only if you purchase a solar system. If you lease one, you can’t take advantage of the credit. The same applies if you are a member of a power-purchasing cooperative. However, if you are a tenant-stakeholder in a co-op, you can claim credit for your proportion of the purchase. You can also claim credit for your proportion of the purchase of a community-owned solar system.

Do You Still Get the Federal Tax Credit If Your State Also Offers One?

The new law doesn’t reduce your federal credit if your state also offers one. But it will be up to your state’s taxing authority whether your state credit is reduced if you take advantage of the federal one.

New York, for example, does not cut its solar incentives for people who take advantage of federal ones; state residents can credit 25 percent of qualified solar energy system equipment expenditures from their state taxes, up to $5,000. You don’t get a refund if that amount is more than what you’d owe, but you can carry over the difference for up to five years.

Can You Use This Credit If You Also Use Other Federal Energy Tax Credits?

Yes. The new law also includes an improved Nonbusiness Energy Property Credit, which covers other qualifying efficiency upgrades, such as Energy Star certified exterior windows, Energy Star certified exterior doors, air-sealing insulation, upgraded electrical circuit panels, and heat pumps. You can claim both credits on your federal return—either in the same year or different years, depending on when the installations are completed.

This credit, now named the Energy Efficient Home Improvement Credit, has dollar caps for some products—for example, $600 on windows. For most items, however, you can claim 30 percent of the cost up to $1,200 total annually. (Heat pumps are exempt from the per-item or per-year maximums; you can claim up to $2,000 for heat-pump purchase and installation costs.)

A big plus: You can claim the Nonbusiness Energy Property Credit every tax year through 2032. In the past, taxpayers who exceeded “lifetime limits” for qualifying home improvements under that provision couldn’t claim the credit for later improvements.

In theory, that means you could install one or two new Energy Star certified windows each year, and qualify toward the $1,200 credit. “That might be irritating to your window supplier and fairly inconvenient for you,” says Mark Luscombe, principal analyst at Wolters Kluwer Tax & Accounting, a financial publisher. “But you could do it.”

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