Homeowner’s Guide to the Federal Tax Credit for Solar Photovoltaics
Are you a homeowner considering solar energy for your property? One of the most powerful incentives available to reduce the cost of installing solar panels is the Federal Solar Investment Tax Credit (ITC). If you're looking to lower your energy bills and reduce your environmental footprint, this tax credit can significantly improve the financial feasibility of going solar. Here’s everything you need to know about how the ITC works and how to take full advantage of it.
What is the Federal Solar Investment Tax Credit (ITC)?
The Solar Investment Tax Credit (ITC) is a federal incentive that allows homeowners to deduct a percentage of the cost of installing a solar photovoltaic (PV) system from their federal taxes. Established in 2006, this credit has been a game-changer for homeowners looking to make the switch to solar, significantly lowering the upfront cost of installing a solar system.
As of 2024, the ITC offers a 30% tax credit for residential solar energy systems, which can be a major savings for homeowners. This rate is scheduled to remain in effect through 2032, after which it may gradually decrease unless Congress extends it.
How Does the ITC Work?
The ITC works as a direct tax credit, which means it’s applied to the amount of federal income tax you owe for the year in which your solar system is installed. You can use the ITC to reduce your tax liability, dollar-for-dollar, based on the cost of your solar installation.
For example, if your solar installation costs $20,000, the ITC will allow you to claim a credit worth 30% of that cost, or $6,000, against your federal taxes. This credit can be applied to the year in which the system is installed, which can make a big difference in your tax return for that year.
Eligibility Requirements for the ITC
To qualify for the Solar Investment Tax Credit, the following conditions must be met:
System Must Be Installed at a Residential Property
The system must be installed at a home you own (not rent) and where you will use the electricity produced by the solar system.Ownership of the Solar System
You must own the solar system—whether you pay for it in cash, take out a loan, or lease it with a purchase option. If you enter into a power purchase agreement (PPA) or lease arrangement where you don’t own the system, you won’t be eligible for the ITC, but the system owner may be eligible to apply the credit.Installation Must Be Completed Within the Tax Year
The ITC is based on the year the solar system is installed and operational, so it’s important that your system is up and running before the year ends in order to claim the tax credit for that year.Qualifying Costs
The ITC applies not only to the cost of the solar panels but also to other related installation costs. This includes labor, permits, electrical components, and even roof repairs that are necessary to install the system.
How Much Can You Save with the ITC?
Let’s break down a few examples to illustrate how the ITC can significantly reduce the cost of going solar:
Example 1: A Family in Florida
Solar installation cost: $18,000
30% ITC: $5,400
Final tax credit: $5,400 off federal taxes for the year the system is installed
In this case, the family will pay $18,000 for the solar system, but after applying the ITC, they can reduce their tax liability by $5,400, making the final cost of the system effectively $12,600.
Example 2: A Couple in Arizona
Solar installation cost: $25,000
30% ITC: $7,500
Final tax credit: $7,500 off federal taxes
For this couple, the total cost of the solar installation is $25,000, but they will receive a $7,500 tax credit. This lowers their total out-of-pocket expense and reduces their federal tax liability for the year.
How to Claim the ITC on Your Taxes
Once your system is installed, claiming the ITC is fairly simple:
Use IRS Form 5695
When filing your federal income taxes, you’ll need to complete IRS Form 5695, "Residential Energy Credits." This form is specifically for tax credits related to energy-efficient home improvements, including solar.Provide Documentation
You’ll need to include documentation that shows the costs of your solar installation, such as invoices or receipts from the installer. Ensure your installer provides you with any relevant paperwork that confirms the system was installed and operational.Apply the Credit to Your Taxes
After completing Form 5695, you will apply the credit to your tax return. If your tax liability is less than the amount of the credit, you may be able to carry the unused portion of the credit forward to future years (if eligible).
Other Incentives to Consider Alongside the ITC
While the ITC provides substantial savings, there are other incentives and rebates that can make going solar even more affordable:
State and Local Incentives
Many states and local municipalities offer additional incentives, including rebates, tax credits, and sales tax exemptions. Use the Database of State Incentives for Renewables & Efficiency (DSIRE) to check for state-specific programs in your area.Net Metering
Many states have net metering policies that allow you to sell excess energy back to the grid, which can earn you credits on your electricity bill. This can further reduce your monthly electricity costs and improve the financial return of your solar investment.Solar Loan Programs
If you can’t afford the upfront cost of solar, many lenders offer low-interest solar loans that allow you to finance the system over time. You can still take advantage of the ITC when you purchase the system with a loan, and the savings from your solar energy production can help pay for the loan over time.
The Federal Solar Investment Tax Credit is one of the most significant incentives for homeowners looking to install solar panels. With the credit offering 30% of the cost of installation, the savings can be substantial. When paired with other state and local incentives, the ITC can make solar energy an affordable and wise financial decision.
If you’re thinking about going solar, now is an excellent time to act—especially with the ITC set to remain at 30% through 2032. Be sure to consult with a tax professional and a trusted solar installer to ensure you're maximizing your savings. By investing in solar, you’ll not only save money on energy bills but also contribute to a cleaner, more sustainable future.
Are you a landowner or an industrial roof owner? Join Telkes in leading the green energy revolution! Let us help you turn your property into a sustainable energy solution that benefits the planet. Visit Telkes today and discover how you can contribute to a cleaner future while maximizing your property's potential. Together, we can power a brighter, greener world!
