7 Thing You Need to Know About the Solar Tax Credit

7 Things You Need to Know About the Solar Tax Credit

Last edited Jan. 19th, 2024

*Tax credits may not apply in every situation, or value could vary. Consult your tax professional.

Most homeowners that make the switch to solar have the opportunity to take advantage of the Residential Clean Energy Credit as another potential way to save money. The 2023 solar tax credit is a government incentive that provides more value to homeowners when they get residential solar.

We're not tax professionals, so we recommend talking to your friendly, local tax advisor for more information on how you can take advantage of the federal tax credit on your solar project.

Solar Tax Resources

Download Form 5695 here.
Visit the IRS website for more information on the Residential Clean Energy Credit.

What is the Residential Clean Energy Credit?

Previously referred to as the Federal Incentive Tax Credit or ITC, this clean energy incentive is a credit that can be claimed on your Federal taxes at a percentage of the cost of your solar. When you switch to solar, you can apply that credit towards your taxes for the year your residential solar was completed or choose to roll over unused credit to the following year. It’s one more way that switching to solar can help you save money!

In August 2022, the US government signed the Inflation Reduction Act, updating the previous ITC to the Residential Clean Energy Credit. The changes provide homeowners more value when making more sustainable home updates. Below we’ll dive into how you can take advantage of this government incentive program.

Ready to learn more about the tax credit for residential solar? Here are 7 things you need to know about the Residential Clean Energy Credit to make the most of your solar savings.

1. The first federal solar tax credit was offered in 2005

Let’s go through a quick history lesson to understand where it started and how it got to its current state.

The Incentive Tax Credit wasn’t the first government incentive for homeowners making energy-sustainable decisions for their homes. The Energy Policy Act of 2005 was the first bill to offer a tax credit for US homeowners. Residential solar owners could take advantage of a tax credit of up to 30% of the qualified investment of up to $2,000.

When the Energy Policy Act expired on January 1, 2008, the US government passed the Emergency Economic Stabilization Act, which extended the ITC and eliminated the $2,000 maximum for residential solar systems.

In November 2016, the US entered the Paris Climate Agreement with 192 other countries, plus the European Union, as a global initiative to take action regarding climate change. As public recognition of the need to take responsibility for global emissions, countries, including the US, have passed legislation to make sustainable changes more viable for everyday Americans.

As the Emergency Economic Stabilization Act was set to expire in 2022, the US government signed the Inflation Reduction Act, recognizing the importance of the incentive in working towards Paris Climate Agreement goals. The solar tax credit that falls under this act continues to provide benefits for residential solar owners for years to come.

2. The government just extended the credit through 2032

When the Inflation Reduction Act was passed by Congress in 2022, it extended the ability for homeowners to take advantage of the Residential Clean Energy Credit beyond 2022 when they purchased and installed a residential solar system.

Now, homeowners can enjoy the savings benefits of solar through 2034.

How to benefit from the tax credit before it expires

If you want to take advantage of the tax credit offered by the government before it goes away, you will need to have your residential solar system fully installed before the end of 2034.

Though it’s not a current worry for homeowners interested in switching to solar, the closer you get to that deadline, the more risk you’re taking on. It's best to stay in touch with your solar company to see where you're at in your project and ensure you'll hit that deadline.

3. The government recently increased the solar tax credit from 26% to 30%

The government not only extended them through 2034 but also increased them from 26% to 30%. That means homeowners that switch to solar can be eligible for tax credits equal to 30% of their total cost.

Prior to the Inflation Reduction Act being passed in 2022, homeowners who switched to solar could only receive 26% of their total solar costs as tax credit.

It's important to note that the 30% tax credit only extends through 2034 as well. If you want to take advantage of tax credits up to 30% of your solar costs, you’ll need to have a completed solar project on your roof before 2033. In 2033, the solar tax credit will be reduced to 26%; in 2034, it will be reduced to 22% before expiring at the end of that year.

Did you know?

The 30% tax credit can also be applied to the cost of a new roof if you bundle it with your residential solar system. That means you can take advantage of even more savings beyond the price of your solar!

4. Not every solar customer qualifies for the Residential Clean Energy Credit

We know everyone wants to take advantage of this government incentive when making the switch to solar. It’s another excellent selling point for getting residential solar and can provide significant savings for many homeowners.

Unfortunately, there are a few requirements homeowners must meet to qualify. Don’t fret! We’ll walk you through the requirements to see if you can benefit from the solar tax credit. And even if you don’t, the math usually shows that Lumio customers can save money with residential solar panels.

Take a look at the requirements below to see if you qualify.

Residential Clean Energy Credit Requirements

1. You are a US taxpayer
2. You installed residential solar between January 1, 2017 and December 31, 2034
3. You are not leasing your panels

Let’s dive in.

1. You are a US taxpayer

2. You installed residential solar between January 1, 2017 and December 31, 2034

3. You are not leasing your panels

Let’s dive in.

You are a US taxpayer:

The federal solar tax credit can be applied towards any owed taxes at the end of the year. That means you must be a taxpayer.

If you are exempt from federal taxes for any reason, such as being on Social Security, you will not qualify for this government residential solar incentive.

You installed residential solar between January 1, 2017, and December 31, 2034

The Inflation Reduction Act extended the credit through the end of 2034. To qualify for it, you must install residential solar panels prior to that date.

Unfortunately, just signing a contract with a solar company before the end of 2034 won’t work. The government requires that the solar is fully installed to take advantage of the tax credit benefits.

You are not leasing your panels

The Incentive Tax Credit is for homeowners who purchase solar through a loan or outright.

If you financed your panels through a lease or PPA (power purchase agreement), you would not qualify for it.

It’s also important to note that there is no income limit or maximum amount of credit that can be claimed through this government incentive. It doesn’t matter your salary or size of your solar system to qualify for the solar tax credit.

5. The Residential Clean Energy Credit is not a rebate

It’s important to note that tax credits come in two varieties: refundable tax credits and non-refundable tax credits. The Residential Clean Energy Credit is a non-refundable tax credit—meaning if you owe taxes at the end of the year you can decrease your tax liability by the amount of your solar credit but if you don’t owe, it may be harder to take full advantage of the program.

What is a tax credit?

A tax credit is a dollar-for-dollar reduction of the income tax you owe. Every dollar decreases your tax liability by a dollar. It's that simple. If you spend $50,000 on your system, you would be eligible for about $15,000 credit when you file your taxes.

The Residential Clean Energy Credit is not a solar panel rebate.

While it can only be claimed once, it can be rolled over for up to five years. That means, if you qualify for up to $10,000 tax credit from your solar and you only claim $2,000 on that year’s taxes, $8,000 of credit can be rolled over to the next year’s taxes.

We know it’s confusing, and we’re not tax specialists. We highly recommend working with your local tax advisor to see how you can optimize your solar savings through the federal solar tax credit.

You are a US taxpayer:

You are not leasing your panels

6. You can still take advantage of the credit when you install solar yourself

You heard that right. You can still enjoy the benefits of the Residential Clean Energy Credit when you do your own solar installation.

There are a few things you should be aware of before you go down the do-it-yourself path, though.

Labor won’t be included in your eligible tax credit

When you hire a solar installer, 30% of the cost of labor will come back to you as eligible tax credit. When you do it yourself, you won’t be able to get the tax credit for your personal labor, however much that may be.

While solar can be seen as an expensive purchase, most people opt to have a professional installer do the work instead of themselves. The added bonus of no extra work on your part is also claiming those costs as part of the solar tax credit.

You’ll need to diligently keep track of your costs incurred

In order to get the most out of the incentive tax credit when you do the work yourself, you’ll need to keep track of every receipt throughout your solar installation project.

When you hire a professional solar installation company, they’ll track all of those expenses for you so you can claim the tax credit on the total cost.

What costs are eligible for the Residential Clean Energy Credit?

Here are some of the most common expenses that you are allowed to claim as part of your solar tax credit:

• Solar equipment
• Freight shipping costs
• Solar consulting fees
• Professional installation costs
• Electrician fees
• Engineer fees
• Tools bought or rented
• Wiring, screws, bolts, nails, etc.
• Equipment purchased new or rented (scaffolding, manlift, etc.)
• Permitting fees
• Permitting service costs
• Required electrical upgrades
• Necessary roofing improvements or reroof

7. There are more ways to take advantage of the solar tax credit than solar

With the passing of the Inflation Reduction Act in 2022, people can make additional energy-efficient changes to take advantage of the tax credit. Most of these were available previously but received the same extension and percentage boost as residential solar.

While solar significantly impacts the environment with the most minimal adjustment to your current lifestyle, there are other ways to take advantage of the Inflation Reduction Act.

Below are some additional changes homeowners can make to their homes that qualify for tax credits through the Inflation Reduction Act:

• Heat pumps
• Heat pump water heaters
• Insulation
• Doors and windows
• Home energy audits

• Heat pumps

• Heat pump water heaters

• Insulation

• Doors and windows

• Home energy audits

How to Claim

Now that you’ve learned a little bit about the federal solar tax credit, how do you actually claim it?

Once your solar is fully installed, file Form 5695 on your next tax return. It’s pretty straightforward; just let the government know how much you spent that year on your different clean energy improvements to your home.

Form 5695 can also be used to carry over credits from the previous year or to receive credits for solar water heating property costs, small wind energy property costs, and more.

Whether you switch to solar through a professional installation company like Lumio or purchase and install the panels on your own, to receive the tax credits, you’ll need to fill out Form 5695 correctly and include it in your tax return.

Download Form 5695 here.

Make sure to reach out to your tax professional with any questions!

Conclusion

We know that there is a lot of information regarding the Residential Clean Energy Credit, which can feel overwhelming. Just remember that this solar tax credit in 2023 is not a solar panel rebate.

Our goal is to help you feel more confident about taking advantage of solar savings through the Incentive Tax Credit.

Talk to your tax professional to know how you could receive the tax credit when you switch to solar with Lumio.

Talk to your tax professional to know how you could receive the tax credit when you switch to solar with Lumio.

Ready to see if Lumio is right for you? Our teams are standing by to help. Let’s go!