Understanding the Residential Federal Solar Tax Credit (2024)
You may be eligible to receive a 30% tax credit on your solar installation costs from Uncle Sam. This article will explain how. Please consult a tax professional to see if you qualify as this article is only intended as a general overview.
What is the Federal Solar Tax Credit?
The federal solar tax credit, officially known as the Investment Tax Credit (ITC) used for Residential Energy Credits, is a financial incentive provided by the U.S. government to encourage the adoption of solar energy. As of the current date of this article, 2024, The ITC allows US homeowners to deduct 30% of the cost of installing a solar energy system from their federal taxes. The 30% credit will apply if you install your new solar system anytime before 2032. In 2033 the credit will lower to 26%, and in 2034 it will be only 22%. As of now, the ITC is set to end in 2035.
How does the tax credit work?
Here is an example of how the credit would work. Let’s say you get a $30,000 solar system installed on your home in 2024. You would be eligible for a $9,000 federal tax credit (30,000 X .3 = 9,000). If for the year 2024, the IRS said you owed $9,000, you could use that $9,000 solar credit to pay the taxes. If you already had federal taxes withheld from your paycheck, you would get that paycheck withholding money back as a refund because the solar tax credit covered your taxes.
Example: 30% of a $30K system = 9K tax credit
If the amount of your federal solar tax credit exceeds the amount you owe in taxes in the current year, you may elect to roll over the tax credit and apply it to the following year and subsequent years. Let’s use the same example of a $30,000 solar installation with a $9,000 tax credit. However, let’s assume that you will only owe the IRS $1,000 in taxes for the next 9 years. In this case, you could pay your taxes for the next nine years using your solar tax credit.
To claim your residential energy solar tax credit, you would need to file IRS Form 5695. You can find Form 5695 and instructions here. You would use the same form to roll over your credits to the next year.
The Solar Tax Credit is Non-Refundable
Non-refundable tax credits reduce the amount of income tax you owe, but they can only bring your tax liability down to zero. If you don’t owe the government taxes, you will NOT get the solar tax credit!
What homes and residencies are covered by the federal solar tax credit?
To qualify for the solar credit, the energy-saving improvements need to be made to your US residence, which can include your:
- House
- Houseboat
- Mobile home
- Cooperative apartment
- Condominium
- Manufactured home that conforms to Federal Manufactured Home Construction and Safety Standards
If you own a condo, the solar tax credit will only apply to the portion that you paid for the solar installation.
What solar expenses are covered by the federal solar tax credit?
Here is a list of what expenses can be used to calculate your solar tax credit. To receive the tax credit, you must purchase new equipment for a new installation.
- Solar Panels: The cost of purchasing and installing solar panels for electricity generation.
- Solar Inverters: Expenses related to solar inverters that convert the direct current (DC) generated by solar panels into usable alternating current (AC) for homes or businesses.
- Mounting Equipment: The expenses for mounting and installing solar equipment, such as racks or frames holding solar panels in place. THIS INCLUDES GROUND MOUNTING EQUIPMENT.
- Wiring and Labor Costs: The costs of wiring and labor associated with the installation of the solar energy system
- Batteries: To qualify for the solar battery federal tax credit, your battery system must have a capacity rating of 3 kilowatt-hours (kWh) or greater. Most residential solar batteries meet this requirement.
If you are financing a solar system, you are eligible for the tax credit on the principle of the loan. However, the additional interest you pay will not be calculated towards the tax credit. If you plan on leasing your solar equipment, you will not be eligible for the solar tax credit.
Do off-grid solar systems with battery storage qualify for Residential Energy Credits?
Yes! Off-grid systems will qualify for the solar tax credit for all the expenses mentioned above. Keep in mind that the batteries must store 3 or more kWh to be eligible for the tax credit.
Do vacation homes qualify for the solar tax credit?
Yes, vacation homes qualify for the tax credit. To verify this, go to U.S. Code for the Residential Clean Energy Credit. Specifically, read 26 USC Section 25D. Subsection (d)(2) defines what is a “Qualified solar electric property expenditure” and it says it is “a dwelling unit located in the United States and used as a residence by the taxpayer.” This is why vacation homes qualify; because the law just says “a residence by the taxpayer” and not “principal residence”.
To further verify that you can claim the solar tax credit for a second residence, you can refer to this government document published by the Office of Energy Efficiency and Renewable Energy, the “Homeowner’s Guide to the Federal Tax Credit for Solar Photovoltaics”. This document again references 26 USC Section 25D which specifies that eligible solar electric property expenditures must be “for use at a dwelling unit located in the United States and used as a residence by the taxpayer” (emphasis added).
It’s crucial to consult with a tax professional or check the latest tax guidelines from the IRS to ensure that you meet all the eligibility criteria and to stay informed about any changes in tax laws or incentives.
Can You Claim the Residential Solar Tax Credit on a Rental Property?
No, you can’t claim the solar tax credit for a rental property you own. However, if you live in the rental property for part of the year, you can apportion the solar tax credit for the amount of time you live there.
As an example, say you installed the same $30K solar system on a property you live at for three months of the year and rent out on Airbnb or VRBO for the other nine months of the year. Instead of receiving the full 9K (30% of $30K) in federal tax credits, you would need to apportion the credit for the amount of time you live at the property. In this case, you would be living at your rental home for a quarter of the year. One-quarter of $9K is $2,250, and that is how much you could claim for your solar tax credit. Again, please consult with a tax professional.
Conclusion
Now is an amazing time to reap the benefits of going solar thanks to the ITC residential federal solar tax credit. Keep in mind that the tax credit only applies to homeowners buying their solar systems. The tax credit does not apply to homeowners who lease their system. Homeowners can also combine this federal tax credit with state or local credits and incentives. Again, the intention of this article is to provide a general overview. Please consult with a tax professional to ensure that your home is eligible.
If you have any more questions, and you are interested in going solar, click the button below for a free quick call to see if going solar will benefit you. There is no stress or obligation. My goal is only to provide consultation and help you find the best solution for your energy needs.
Thank you for reading,
Brian Walker
