What are the Tax Benefits of Solar Panels?

Have you ever wondered whether it was a good time to go solar? Does the allure of harnessing the sun for all your power needs pull at your eco-friendly heart?

With the recent tax package issued into law on December 27th of 2020 by the Environmental Protection Agency and the Department of Energy, there has never been a better time than now to go solar.

Read on to find out how much money you could save by installing solar panels on your property in our comprehensive guide to the tax benefits of solar panels.

Congress Increased Tax Incentives to Go Solar

Solar energy still only accounts for 2.5% of the energy produced in the U.S., but Congress is taking the initiative to increase this number by providing Americans the opportunity to claim solar tax credits.

This credit can equal up to 30% of the total cost of installing your solar panels.

Be on the lookout for the duration of this program. Eligibility for full credit began in 2019. It dropped down since then and will cease at the end of 2023.

You must also make sure your equipment qualifies for the tax credit. For your equipment to qualify, it must heat water or generate electricity. It also MUST improve your place of residence.

This means that solar panel projects used for experimental or scientific study will not be approved for credit.

How the Life of Solar Panel Tax Benefits Has Changed Over the Years

Beginning in 2005, the solar panel tax credits were implemented by the U.S. federal government in 2005, but have since decreased over the years. With the new Energy Star program, incentives to go solar have been revitalized.

The time table is as follows:

  • Was initially established by the Energy Policy Act of 2005.
  • Meant to expire end of 2007, but the ITC kept it at 30% until 2019.
  • It dropped to 26% in 2020.

Before this new legislation, it was set to be zero at the end of 2021, but it has since been extended to remain at 26% until the end of 2022.

  • It will drop to 22% in 2023.
  • It will drop to 10% in 2024.

Judging by the history of changes made to the life of this policy, one can expect but NOT rely upon modifications to be made in the future.

Also, credit can only be claimed during the year of completion. For instance, if you bought the tools and equipment in 2020, but didn’t complete the project until 2023, you will only be able to claim 22% as opposed to 26%.

How Does Solar Tax Credit Work?

It’s quite simple. All you have to do is own a solar energy system to be eligible for the solar tax credit. This means that you must strictly be the owner of your solar energy system.

You will not receive credit if:

  • You sign a lease with a solar installer
  • You sign a PPA with a solar installer
  • You don’t have enough tax liability to claim the credit

There are several different expenses you can claim as they pertain to the Federal Solar Tax Credit, including:

  • Solar equipment
  • Solar consulting fees
  • Electrician/engineer fees
  • Tools used
  • Shipping costs
  • Wiring
  • Screws, bolts, nails
  • Permitting fees and service costs
  • Equipment rented
  • Hired contractors
  • And more…

Although you could install the equipment yourself, keep in mind that you can claim hiring a contractor as an expense, so consider weighing your options to decide which approach will yield the greatest return on investment.

How to Claim the Tax BenefitsĀ of Solar Panels

You can claim solar tax benefits on your federal tax returns. You can either work with your accountant on the matter or do it yourself.

If you choose to claim solar tax benefits on your own, be sure to use EnergySage’s step-by-step process to help guide you through your ITC Form 5695.

Make sure your credit is less than the income tax due. If your credit is larger than your tax bill, the IRS won’t give you your money back (using your credits).

This doesn’t mean that the money is gone forever, though. You can carry over those credits to the following year.

Understand that the tax credit plays a crucial role in getting the best bang for your buck as it pertains to the investment benefits of using solar energy.

But as the year unfolds, you’ll find that grid-tied solar systems pay for themselves in the long run.

Claiming Solar Tax Credits for Rental Properties

Unfortunately, you can only claim solar tax credits for properties you live in. This means that if you have multiple rental properties with solar panels installed, you can’t claim them if other residents are living there.

You can claim partial credit if you live in those properties for a set period of time.

For instance, if you reside in that rental property for 6 months, you can claim 50% of the percentage you could claim if you had left there the whole year.

This is what it would look like:

  • Let’s say it cost you $10,000. You get 26% credit ($2600).
  • You live there for 6 months. You get 50% of that 26% credit ($1,300).

The rules are quite strict but if you understand how they operate, you can be sure to get the best bang for your buck.

A Promising Future

Although solar tax benefits are dwindling as the years go by, the fact remains that going solar is its own reward both environmentally and financially.

Be sure to keep an eye out for changes in the political atmosphere that may impact initiatives made by organizations like The Solar Energy Industry Association and Biden Administrations 117th Congress.

The Solar Vision is sure to pick up speed as the years unfold!

Did You Find This Information Useful?

We hope this article provided you with all you need to know about the tax benefits of solar panels.

If you’d like to learn more about the financial benefits of going green, be sure to check our Altair Solar Blog!

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