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June 21, 2019

Solar Tax Credit By State In 2024: The Ultimate Federal Solar Energy Tax Credit Guide

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With solar cost of solar energy systems averaging around $16,000 in cost, transitioning to solar power represents a significant financial commitment. While the initial figures may seem daunting, various incentives at the federal, state, and local levels exist to alleviate the burden. This comprehensive guide on state-specific solar tax credits is designed to help you navigate the plethora of available offers, ultimately saving you a substantial amount on installation expenses and positioning you for long-term financial gains.

Key Points to Remember

  • The federal Solar Investment Tax Credit (ITC) serves as a direct tax reduction incentive for individuals installing new solar energy systems.
  • As per the Inflation Reduction Act, the ITC currently stands at 30% of the solar system cost until 2033, gradually decreasing until its expiration in 2035.
  • Local incentives such as property tax exemptions, SREC markets, and utility rebates vary from one region to another.

Understanding Tax Credits:?

A tax credit directly reduces the tax liability of an individual or business. Unlike tax deductions, which lower taxable income, tax credits eliminate the actual tax obligation, offering a dollar-for-dollar reduction in taxes owed. These credits cover a wide array of areas, including childcare, education, and energy efficiency, encouraging socially or economically beneficial actions by providing financial relief through the tax system.

Tax credits typically come with specific eligibility requirements, necessitating taxpayers to meet certain qualifications or undertake particular actions to qualify. The value of these credits can vary; some offer fixed amounts based on qualifying steps taken or purchases made, while others provide a percentage of the total expenditure.

Understanding the Federal Solar Tax Credit:?

Also known as the Solar Investment Tax Credit (ITC), the federal solar tax credit aims to promote investments in renewable solar energy. This credit offsets a specific percentage of the solar system’s costs, thereby reducing the taxpayer’s federal income tax liability by that same amount. It encompasses both solar panel equipment and installation costs but excludes any structural modifications made to support the panels.

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How Does the Federal Solar Tax Credit Function?

Eligibility for the federal solar tax credit hinges on the ownership of the solar energy system. Individuals engaged in a lease or a power purchase agreement (PPA) with the solar installer do not qualify for the tax credit since they are not recognized as system owners. Furthermore, the taxpayer’s tax liability must match or exceed the amount of the credit. Any excess credit can be carried over to subsequent years if the full amount is not utilized in the current tax year.

Extension of Solar Tax Credit

In 2022, Congress enacted the Inflation Reduction Act, introducing several significant amendments to the solar tax credit. Most notably, it extended the duration of the credit until 2035 and raised the credit percentage from 22% to 30% until 2032. Individuals who installed a solar system in 2022 and have yet to claim the credit can now benefit from the increased 30% credit amount.

Another noteworthy change involves the expansion of eligible equipment to encompass energy storage devices with a capacity rating of 3 kilowatt hours (kWh) or more, including standalone storage units. The U.S. Department of Energy strongly advocates for pairing these storage devices with solar systems to amplify benefits and enhance energy capabilities.


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The Inflation Reduction Act Solar Tax Credit Step-Down Schedule












What Does the Federal Solar Tax Credit Cover?

The federal solar tax credit covers the following:

  • Solar panels or PV cells
  • Solar water heaters
  • Energy storage devices with a capacity of 3 kWh or more
  • Contractor labor expenses, including site preparation, assembly or initial installation
  • Permit fees
  • Inspection costs
  • Developer fees

Eligibility for the Federal Solar Tax Credit

You may be eligible for the federal solar tax credit if your installation meets the following criteria:

  1. Your solar system was installed between January 1, 2017, and December 31, 2034.
  2. The system is situated at your U.S. residence, which the IRS defines as a place where you have resided during the year for which you are claiming the credit. This can include various types of dwellings such as a house, mobile home, houseboat, condominium, cooperative apartment, or manufactured home.
  3. You either own the solar system outright (purchased with cash or financed, but not leased or part of a power purchase agreement with the solar company), or you have acquired an interest in an off-site community solar project, with electricity credited against and not exceeding your home’s usage.
  4. The solar system is new or in first-time use: the credit applies exclusively to the original installation of the solar equipment.

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Eligibility Criteria for Solar Energy Systems

To qualify for the federal solar tax credit, you must install a solar energy system that supplies electricity to a U.S. residence. This includes solar panels, solar water heaters, and energy storage devices.

Solar Water Heaters

Solar water heaters consist of a solar collector and storage tank, utilizing the sun’s thermal energy to heat water. To be eligible for the tax credit, solar water heaters must be certified by the Solar Rating Certification Corporation or an equivalent entity endorsed by your state.

Solar Panels (Photovoltaic Systems)

Solar panels, also known as photovoltaic (PV) panels, are flat structures resembling windows that convert sunlight (in the form of photons) into electricity. There are three main types of solar panels —monocrystalline, polycrystalline, and thin-film—that can substantially reduce your electricity costs.

Energy Storage Devices

Stand-alone energy storage devices with a capacity rating of 3 kilowatt hours (kWh) or more are also eligible for the solar tax credit. These devices do not need to be connected to a solar system to qualify.


How to Claim Solar Tax Credit

After purchasing and installing your solar power system, the tax credit can only be claimed once. You can work with your solar provider to obtain the necessary documentation and apply the credit to your taxes. Here are the steps to claim the solar tax credit:

  1. Fill out IRS Form 5695 and include it in your tax return.
  2. In Part I, calculate the amount of the tax credit.
  3. Classify your solar system as “qualified solar electric property costs.”
  4. On line 1, input your system’s total cost (do not include the cost of structural modifications to accommodate the system).
  5. On lines 6a and 6b, perform the calculations.
  6. On line 14, list any tax liability limitations (see the IRS instructions for Form 5695 for more information).
  7. Complete the calculations on lines 15 and 16.
  8. Enter the figure from line 15 on line 5 of your Schedule 3 (Form 1040).

Any unused portions of the tax credit that surpass the tax liability can carry over to next year’s taxes.

When is the Optimal Time to Transition to Solar?

To maximize the benefits of the federal solar tax credit, the ideal time to make the switch to solar power is before December 31, 2032. The credit gradually diminishes in 2033 and 2034, ultimately expiring in 2035. If it aligns with your financial plan and you have a long-term strategy to adopt solar energy, taking action sooner rather than later can optimize your potential energy savings and ensure you receive the full tax credit.

Nevertheless, despite the constrained timeline, it’s crucial to assess whether solar panels are a suitable investment for your circumstances. One key consideration is the duration you intend to remain in your current residence—energy savings accrue gradually over time, so committing to your long-term abode before investing is advisable. Additionally, factors such as the amount of sunlight your location receives and electricity rates in your area should be taken into account. Conducting a comparison between current expenses and potential savings will aid in determining whether it’s the opportune moment to make the switch.

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How Do Other Incentives Impact the Federal Solar Tax Credit?

While most solar rebates, tax credits, and renewable energy certificates for new solar customers do not directly affect the solar Investment Tax Credit (ITC), they can influence the credit amount if they reduce the total installation cost. For example, utility rebates are deducted from the system costs before calculating the tax credit. Moreover, payments received for renewable energy certificates might be considered taxable income, potentially increasing your federal tax liability.

State Government Incentives

Regarding state government rebates, they typically do not diminish federal tax credits. State tax credits for solar installation generally do not directly impact federal costs. However, claiming a state tax credit could elevate reported taxable income on federal taxes due to reduced state income tax deductions, thereby affecting federal tax liability.

State Solar Incentives

In addition to the federal solar Investment Tax Credit, some states provide incentives for new solar system purchases. The Database of State Incentives for Renewables & Efficiency furnishes specific details for each participating state.

State Tax Credits

Certain states offer supplementary tax credits for solar system purchases. These function similarly to the federal solar ITC, with the tax credit deducted from any state taxes owed. The amount of the tax credit varies by state.

State Government Rebates

State government rebates for solar energy typically consist of a fixed amount of money awarded to individuals who purchase a solar system or other qualifying solar technology (e.g., solar water heaters and solar batteries). These rebates are often available regardless of whether the homeowner owes any federal taxes.

Solar Renewable Energy Certificates (SRECs)

As part of the EPA Green Power Partnership, Solar Renewable Energy Certificates (SRECs) serve as a state-level solar incentive. SREC markets operate based on renewable energy certificates representing the rights to non-power aspects of renewable electricity generation. Homeowners and businesses with solar systems in states with SREC markets can lower their energy expenses by selling associated SRECs to utility companies. The value of an SREC is determined by supply and demand, with much of the demand stemming from electricity suppliers needing to comply with their state’s Renewable Portfolio Standard (RPS) or pay a compliance premium.

Other Incentives

Along with rebates and tax incentives at the federal and state level, there are several other potential avenues to save on the cost of installing solar panels.

Local Utility Rebates

Local utility companies often offer rebates for installing a solar PV system. These subsidies are excluded from income taxes. The rebate amount is subtracted from the total solar system cost before calculating the solar tax credit.

Subsidized Loans

Subsidized loans offered by state entities or local utility companies aid in financing solar panel purchases. Solar installers can typically guide customers on available local solar programs, including subsidized loan options.

Tax Exemptions

Property tax exemptions allow homeowners and businesses to exclude the increased value from a solar system when assessing property taxes. Since property taxes are locally collected, some states allow local taxing authorities to offer this solar-related tax incentive.

Bottom Line

With tax credits and additional benefits available at federal, state, and local levels, now is an opportune moment to transition to solar energy. Although the initial cost of solar energy systems may seem daunting, the financial relief provided by these incentives, coupled with the long-term return on investment of solar panels, renders them a prudent investment.  

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