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The Solar Panel Tax Credit: Maximize Your Savings

Understanding the Solar Panel Tax Credit:

How to Maximize Your Savings

On average, a solar panel system costs between $13,620 and $26,686 before any rebates are applied. For many American families, paying this amount outright may be unrealistic without some form of financial relief.

 

The federal solar tax credit can significantly reduce the cost of your solar panel investment. This incentive, provided by the government, covers at least one-third of the solar installation cost and can help ease the financial burden for homeowners seeking to use clean energy. Here’s everything you need to know about claiming the solar panel tax credit.

 

Key Takeaways

Through 2032, the federal solar investment tax credit (ITC) will cover up to 30% of the total cost of your solar project. In some cases, if certain requirements are met or the project is in specific markets or economic conditions, the credit can be as high as 60%.

The tax credit includes expenses from permitting to the solar panels themselves.

 

 

What is the Federal Solar Tax Credit?

The solar investment tax credit (ITC), officially known as the Residential Clean Energy Credit, offers a substantial financial incentive to make solar installations more affordable for homeowners.

 

The Inflation Reduction Act of 2022 extends the tax credit, allowing you to offset up to 30% of the total solar panel installation cost through 2032. Under certain conditions, this credit can reach up to 60%. The credit will decrease to 26% in 2033 and to 22% in 2034. For installations in 2024, the tax credit applies to taxes filed in 2025.

 

Solar Tax Credit Step-Down Schedule

The solar tax credit will decrease to 22% in 2034 and could be eliminated for the 2035 tax year unless further extended by the government. Review the step-down schedule below to plan accordingly:

 

How Does the Solar Tax Credit Work?

When filing your 2025 federal income taxes, the solar tax credit allows eligible property owners to deduct up to 30%, or up to 60% under certain conditions, of their solar system installation costs from their tax liability. If the credit exceeds your tax liability, you can carry the excess forward to offset future tax obligations.

To qualify for the ITC, you must own the solar system. Typically, if you pay for solar with cash or a loan, you own the system. However, if you lease the system or have a power purchase agreement (PPA), you do not own it and therefore aren’t eligible for the ITC.

 

How Do You Qualify for the Solar Tax Credit?

  • To claim the solar tax credit, you must meet the following criteria:
  • Property Ownership: The credit is available for property owners who install solar panels. It does not apply to landlords or properties not lived in by the owner.
  • New Installations Only: The credit applies only to new solar panel installations, not replacements or additions to existing systems.
  • System Must Be Operational: The solar system must be fully operational at the time of claiming the credit.
  • Owned Systems Only: You must own the solar system. Leased systems do not qualify.

 

Installed During the Tax Year: The installation must be completed in the tax year for which you’re claiming the credit. For taxes filed in 2025, the installation must be completed in 2024.

Compliance with Standards: Ensure the solar system meets IRS performance and safety standards. Commercial solar investments may qualify for the ITC or the production tax credit (PTC).

 

What Does the Solar Tax Credit Cover?

The solar tax credit includes various expenses related to solar panel installation, such as:

  • Installation Costs: Includes labor and mounting equipment.
  • Solar Panels: Covers the cost of the panels themselves.
  • Wiring and Inverters: Includes costs for wiring and inverters.
  • Solar Storage Systems: Costs for storage systems like batteries are covered.
  • Permitting and Inspection Fees: Fees for permits and inspections are included.
  • Professional Fees: Fees for professionals like engineers or architects are covered.

 

 

How Much Can I Save with the Solar Tax Credit?

Consider this example: A homeowner takes out a $100,000 solar loan in December 2024, with installation completed in July 2025. The ITC credit would be $30,000 ($100,000 x 30%).

If the homeowner owes $20,000 in federal income tax and $14,000 has been withheld, they would typically need to pay $6,000 at tax time. Instead, they can use the $30,000 ITC to cover the $6,000 owed and receive a $14,000 refund. The remaining $10,000 of the ITC can be claimed on future tax returns.

Remember, the solar tax credit is a dollar-for-dollar reduction in your tax liability, which can significantly boost your savings. It’s important to note that it’s a credit, not a refund.

 

Bottom Line

The Investment Tax Credit covers up to 30% of installation costs for solar panels and can be as high as 60% under certain conditions, making solar power more accessible and affordable. To claim the credit, complete IRS Form 5695, calculate the credit, and submit it with your tax return. With the credit potentially expiring in 2035, planning ahead can lead to significant long-term savings and environmental benefits.

 

Frequently Asked Questions (FAQs)

 

Can I still get the tax credit if I lease my solar panels?

As of now, the federal solar tax credit applies only to owned solar systems. Check the latest IRS guidelines or consult a tax professional for updates.

Does the solar panel tax credit apply to businesses, government, or non-profits?

Yes, the Investment Tax Credit (ITC) can apply to solar investments made by commercial entities, government organizations, and non-profits, as outlined in the Inflation Reduction Act. In fact, non-profits, tribal nations, government entities, and certain other groups can now receive a cash payment from the IRS for the tax credit, if they qualify. This development is transforming solar adoption for these groups. Given the fluctuating political landscape, it’s wise to take advantage of this cash incentive while it is available!

Can I claim the tax credit if I install solar panels on my rental property?

No, the credit applies only to primary residences. Check the latest IRS guidelines or consult a tax professional for the most up-to-date information.

How many times can I claim the solar panel tax credit?

The credit can generally be claimed once per installation. It applies to new installations only. If the credit exceeds your tax liability, the excess can be carried forward to future tax returns without a maximum claim limit.