The Solar Investment Tax Credit (ITC)

What is the Solar ITC?

The ITC is a federal tax credit that allows you to deduct a percentage of the cost of installing a new solar energy system from your federal income taxes. It's a dollar-for-dollar reduction in the amount of tax you owe, making it a very powerful financial incentive.

Key things to understand about it being a "tax credit":

  • Not a deduction: A deduction reduces your taxable income, while a credit directly reduces the amount of tax you owe. A $1,000 tax deduction might only save you $200-$300 depending on your tax bracket, but a $1,000 tax credit saves you a full $1,000.

  • Non-refundable: This means the credit amount cannot exceed your federal tax liability for the year. The IRS won't send you a check for any amount of credit that goes beyond what you owe.

  • Carry forward: If your credit amount is more than your tax liability in the year you install the system, you can "carry forward" the unused portion of the credit to offset your taxes in future years, as long as the credit is still in effect.

Current ITC Rate and Duration

Thanks to the Inflation Reduction Act (IRA) of 2022, the solar ITC was significantly extended and increased.

  • 30% for systems installed from 2022 through 2032.

  • 26% for systems installed in 2033.

  • 22% for systems installed in 2034.

  • The credit is currently scheduled to expire after 2034, unless Congress extends it again.

There is no maximum limit on the amount of credit you can claim.

What Costs Are Included in the ITC?

The 30% credit applies to the "eligible costs" of your solar energy system, which generally include:

  • Solar PV panels (or cells): The main components that generate electricity.

  • Related equipment: This includes inverters (string, microinverters, or power optimizers), mounting hardware, wiring, and other balance-of-system components.

  • Labor costs: For on-site preparation, assembly, and installation of the solar system.

  • Permitting and inspection fees: Any fees paid to local governments for permits and inspections.

  • Battery storage technology: Starting in 2023, standalone battery storage with a capacity of at least 3 kWh also qualifies for the 30% ITC, even if it's not installed with new solar panels.

  • Sales tax: The sales tax paid on eligible equipment can also be included.

What's generally NOT included:

  • Structural improvements: Costs for roof repairs, replacements, or modifications made solely to support the panels (unless they are specifically solar roofing tiles or shingles that generate power themselves).

  • Tree removal: While shading impacts solar production, the cost of removing trees to improve sun exposure is not included.

Who Qualifies for the Solar ITC?

To be eligible for the residential clean energy credit, you must meet the following criteria:

  • You must own the solar energy system: This is crucial. If you lease your solar panels or sign a Power Purchase Agreement (PPA) where you only pay for the electricity generated, the solar company (who owns the system) claims the ITC, not you.

  • The system must be new and used for the first time.

  • The system must be installed at a residence located in the United States. This can be your main home, a second home you live in part-time (the credit would be prorated based on personal use), a houseboat, mobile home, co-op apartment, or condominium. You cannot claim the credit if you are a landlord and rent out the property without living there yourself.

  • You must have federal tax liability: Since it's a non-refundable credit, you need to owe federal taxes to benefit from it. If you have no tax liability, you won't get a direct refund, but you can carry the credit forward.

How to Claim the ITC

To claim the Solar ITC, you'll need to:

  1. File IRS Form 5695, "Residential Clean Energy Credit," with your federal income tax return for the year your solar system was "placed in service" (i.e., when the installation was completed and it was operational).

  2. Keep good records of all your eligible expenses, including invoices and receipts from your solar installer.

It's highly recommended to consult with a tax professional or a qualified accountant when claiming the ITC, especially for larger or more complex installations, to ensure you maximize your benefit and comply with all IRS regulations.

Importance of the ITC

The ITC has been a cornerstone of solar energy growth in the U.S. by:

  • Significantly lowering the net cost of solar: Making it more affordable for a wider range of homeowners.

  • Stimulating the solar industry: Leading to job creation, technological innovation, and increased competition, which in turn helps drive down solar costs.

  • Encouraging renewable energy adoption: Contributing to a cleaner energy grid and reducing reliance on fossil fuels.