Solar Tax Credit Changes in 2023: Everything You Need to Know

Dec 6

If you are a homeowner interested in investing in solar energy for your home, you are probably already aware that there are tax credits available to help cover the cost of installation. You may also be aware of the primary federal solar tax credit—the Investment Tax Credit, or ITC. However, you may not be aware that the ITC tax credit has undergone some changes this year.

This article will explain exactly what the ITC is, how this solar tax credit changed in 2022, and how those changes will affect homeowners planning to do new solar installations in 2023 and beyond.

“We were thrilled to learn about the changes to the ITC this year, and hope these changes will help make adding solar to your home even more appealing.”

~Phillip Gao, CEO of Sunflare

What Is a Solar Tax Credit?

A solar tax credit allows you to reduce the amount of tax that you owe if you installed solar panels in your residential property during the previous year. It is a reduction in your tax bill, equal to a percentage of the cost of the solar installation you did that year.

The solar tax credit we refer to in this article is called the solar Investment Tax Credit, or ITC. This federal solar rebate was enacted in 2006, and since then, has allowed individuals to receive a reduction in their income tax bill when they install solar panels on their homes.

The solar Investment Tax Credit is considered by many to be one of the most important pieces of federal policy to incentivize clean energy investment in the United States. The ITC federal tax credit for solar panels has directly impacted the amount of solar deployed across the country and has played a key role in making our economy both stronger and cleaner.

However, as part of the successful passage of the Inflation Reduction Act of 2022 (IRA), the ITC was increased and extended. Now, homeowners are entitled to a reduction in their taxes of 30% of the cost of their solar installation.
Additionally, the ITC has been extended to run for the next ten years. The 30% reduction will be available to homeowners every year from 2022 to 2032. In 2033, the rate will drop from 30% to 26%. In 2034, it will drop again from 26% to 22%. The rate is scheduled to drop to zero in 2035.
This means that homeowners still in the research phase of their solar installation have plenty of time to decide and will have the opportunity to take advantage of this residential solar tax credit for years to come.
Previously, the ITC provided a 26% federal tax credit through 2022. That meant that anyone installing solar on their residential property before and during 2022 was entitled to a reduction in their income tax bill up to 26% of the cost of their residential solar installation.
In 2023, the ITC residential solar tax credit percentage was scheduled to drop to 22%, meaning homeowners could only reduce their tax bill by 22% of the cost of their solar installation. After 2023, the percentage was scheduled to drop to zero.

How the Solar Tax Credit Works

The ITC is a dollar-for-dollar reduction in the amount of income tax you owe based on the cost of your solar installation. There is no upper dollar limit on how much you can save. So if you spend $2000 or $200,000 on your solar installation, you are still eligible to receive 30% of that amount off your taxes for the year. Let’s look at some examples.

Under the old ITC, if you spent $10,000 on your solar installation in 2022, and your income tax bill was $8000, you would be eligible to deduct 26% of $10,000 from that tax bill (which comes out to $2600.) That would bring the tax you owed from $8000 down to $5400.

Under the new extended ITC, if you spent the same $10,000 and your income tax bill was $8000, you would be eligible to deduct 30% of $10,000 from that tax bill (which comes out to $3000.) That brings your income tax bill from $8000 down to $5000.

What About Rebates?

What if the amount that you deduct from your taxes because of the ITC means you now qualify for a rebate? For example, what if you owed $2500, spent $10,000, got a $3000 (30% of $10,000) credit on your taxes, and were left with a $500 remainder?

Unfortunately, you can’t claim that remainder as a tax refund in the same year. However, you can carry that refund forward into later years.

Who Qualifies For a Solar Tax Credit?

All taxpayers are eligible for the federal solar tax credit on either their primary or secondary residence located within the United States. All tax brackets are eligible, and taxpayers of any income level can claim it. You can claim it whether you take the standard deduction or itemized deductions.

What Homes Are Eligible?

To qualify for these government rebates for solar panels, you must have made the improvements to your US-based residence. A residence is considered one of the following:

Manufactured home that conforms to Federal Manufactured Home Construction and Safety Standards

What Expenses Are Eligible?

The same expenses that were covered in the original solar Investment Tax Credit are still covered in the new version of the ITC, with one small change. Covered expenses are as follows:

Solar panels
(photovoltaic panels and solar cells)

Any additional equipment needed to get the system up and running
(wiring, inverters, mounting supplies, etc.)

Fees associated with installation
(permitting fees, inspection fees, developer fees)

The small change from the previous version of the federal solar tax credit is that any installed storage batteries must store at least 3 kilowatts.

What About New Homes With Solar Already Installed?

Prospective homeowners looking at purchasing a home with solar already installed will be happy to know that the ITC also applies to them. If the homeowner owns the new solar system outright, they are eligible for the ITC the year they move into the house.

If you lease the system or purchase power from the system through a Power Purchase Agreement (PPA), the company that owns the system is eligible for the ITC, not the homeowner.

Can You Get the Federal Solar Tax Credit If Your State Also Has One?

Yes, you can still get the federal credit if your state also offers a solar tax credit—however, if you claim the federal credit, it will be up to your state to decide if and how to apply the state credit.

For example, California and New York both allow their residences to claim the federal solar tax credit in addition to state credits. Tax laws may vary depending on the state you live in.

Are There Any Other Changes to the Federal Solar Tax Credit?

The new ITC also includes improvements to the Nonbusiness Energy Property Credit (renamed the Energy Efficiency Home Improvement Credit.) This credit covers other energy efficiency upgrades such as Energy Star-certified exterior windows, doors, insulation, heat pumps, etc.

You can claim both credits in the same year, and the Energy Efficiency Home Improvement Credit is also available through 2032.

How to Claim the Solar Tax Credit

To claim the solar tax credit, you must file IRS Form 5695 as part of your regular tax return. Calculate your credit amount in part one of the form, and enter the amount in your 1040. If you failed to claim the credit in a previous year, you can file an amended tax return to claim the credit this year.

Conclusion

The solar Investment Tax Credit is a major incentive for homeowners to take the leap and install solar on their properties, and fortunately, it’s not going away anytime soon. With the extension of the ITC, there has never been a better time to invest in solar for your home.

Sierra Eberly