How to Use Tax Credits for the Best Return on a Solar Panel Investment

Last Modified Date: February 10, 2024

Investing in solar panels for your home is a great way to save money over the long haul. But reducing your energy bill is not the only way to claw back some of your initial outlay.

Federal solar tax credits can help you recoup 30% of your spending, considerably reducing how long it takes solar panels to pay for themselves. With the right knowledge, you can maximize your return on investment by utilizing the various tax credits available.

One of the first steps begins with understanding how to use solar initiatives to save money, and you can get started today.

Increase Solar Panel ROI with the Federal Solar Tax Credit Initiative

Installing solar panels is a significant yet intelligent investment for most homeowners. Switching to a renewable energy source means considerable savings on your utility bills.

While lower energy bills are a great idea, especially in the current economic climate, many homeowners are concerned with finding methods of maximizing the return on investment from their solar panels.

A federal solar tax credit is one of the best ways to boost your solar panel ROI. The US government designed these solar initiatives to encourage citizens to install and use green energy sources.

What is the Solar Tax Credit Program?

The government started the solar Investment Tax Credit (ITC) program in 2006. However, the initiative has gone through several updates and renewals since then.

In August 2022, the Biden administration expanded the Federal Tax Credit for Solar Photovoltaics. As a result, US homeowners can claim this tax credit on a percentage of the costs of installing solar systems. Until 2032, the amount will be 30%.

What is a tax credit?

A tax credit is a government-provided benefit typically used to incentivize desirable behaviors. If you successfully apply for a tax credit, you reduce the annual income tax you owe the IRS.

For example, if your income tax bill for the year is $4,000, and you get a tax credit of $1,000, you now owe $3,000.

How much is the federal solar tax credit?

As we mentioned earlier, you can get a solar tax credit of 30% of the costs for the tax year the installation takes place. Additionally, because it's a federal tax credit, it only applies to federal taxes.

The cost of the solar PV system you install is what determines how much money you save. According to Energy.gov, that means savings of $7,500 on average systems. That's on top of the forecasted $9,000 savings over the system's lifetime. For more information about the average cost of solar panels, read our helpful guide.

What income limits exist for the solar tax incentives?

The solar tax credit program does not impose any limits. US taxpayers can claim this credit on any solar panels and equipment investments made during the tax year.

Is the solar tax credit refundable?

No. The solar tax credit is non-refundable. That means if your tax credit is larger than your tax liability (the money you owe), you don't get the balance back in the form of a check. Instead, you can roll over the excess into the next year and save money on those taxes.

What type of home qualifies for the credit?

The solar tax credit scheme covers several different types of property, including:

Single family homes
Condos
Cooperative apartments
Manufactured homes, provided they conform to the Federal Manufactured Home Construction and Safety Standards
Houseboats and mobile homes

But remember, the solar tax credit is only available to whoever insults the solar panel system. If you don't own the home and don't pay to install the system, you can't get the solar tax credit.

Even if you lease solar equipment for your home, you can't access the benefits of the solar tax credit initiative. The credits only cover buyers who purchase and install the systems.

Let's look at the equipment covered by the solar tax credit system.

What costs and equipment are eligible and ineligible under the solar tax credit system?

The solar tax credit covers a few different costs that you can incur if you invest in a solar system.

You can claim back money on the following:

Solar panels and supporting equipment that provide your home with heat and energy
Any labor costs associated with installing and setting up your solar panel system
3-kilowatt hours (kWh) or above batteries used for storing the solar power you generate
Any materials you purchase to help install your solar energy system, such as brackets, wires, and so on
The sales tax on materials and equipment used for your installation
Now that you know what costs are eligible under the solar tax credit initiatives, you need to know which costs you can't claim back. The solar tax credit does not cover
Equipment (e.g., fans) you purchase that is run by your solar panel system
Systems you install to heat pools or hot tubs
Systems that you buy to lease out to other homeowners

Who is eligible for the solar tax credit program?

Solar tax credits are only available to people who meet specific criteria.

You must:

Install the solar panel system January 1st, 2017, and December 31st, 2034
Own the solar panel system and install it in your primary or secondary US home
Have an interest in an off-site community solar energy system whose energy offsets but does not exceed your electricity bill.

Additionally, your solar panel must be new or activated for the first time. The solar panel tax credit only covers the original installation.

Can I claim a solar tax credit for my rental property?

That solar tax credit is only available for rental properties if you live there part-time. The scheme is not eligible for owners who rent their property year-round.

For example, if you live in a property during May-June, you are eligible for the solar tax credit for those three months. If the system costs a total of $10,000, you qualify for $3,000 per year, but you can only get 25% of the tax credit, or $750.

How can I claim the solar tax credit?

To claim the solar tax credit, you must fill out IRS Form 5695. This form helps prove you are eligible for the tax credit. Working out your credit is as simple as totaling the costs of installing your solar panels and working out 30% of that number.

Once you've calculated the amount, you can add it to your IRS Form 1040 and Schedule 3.

Remember, if your solar tax credit is more than you owe in federal taxes, you can carry the credit over to the following year.

When does the solar tax credit initiative end?

The solar tax credit incentives are available until 2035. However, the 30% credit will stop in 2033. Following these dates, the tax credits will be:

26% of the cost for 2033
22% of the cost for 2034

Will state solar tax credits affect my federal solar tax credits?

Both the federal and state governments use solar incentives to encourage their citizens to install clean energy systems. So, you might wonder if you can access both at the same time. The answer is that it depends on your state.

Getting a state solar tax credit will not stop you from accessing the federal solar tax credit. However, some states will not grant you these credits if you avail of the federal program.

For more specific information about your state, look at the Database of State Incentives for Renewables & Efficiency. Alternatively, get in touch, and we can offer you some guidance.

Why invest in solar panels?

Saving money through solar tax credits is a compelling reason to invest in solar panels. However, it's just one of many. Some of the other benefits of installing solar panels are:

Renewable energy helps you reduce your reliance on electricity provided by your utility company. Installing solar power reduces your total bill, which is vital during times of excessive energy costs.
Solar panels are environmentally friendly. Climate change and global warming are significant concerns; it's essential to make changes where possible.
Solar tax credits are available if you take out a loan to install your solar panels. This situation means you can collect a tax credit without paying out a large sum of money upfront.

Final thoughts

Getting a return on your solar panel investment is essential. You can significantly reduce the timeline of your solar panels paying for themselves when you access a solar tax credit.

Figuring out which solar panels to choose is challenging when you don't have much experience. Smart Solar is here to help and offer the advice you need to make an investment that pays off with lower energy bills.

If you’re ready to the make the switch to solar, then check out SmartSolar.org