The U.S. federal solar tax code (IRC § 25) provides two primary solar tax credits that apply in different scenarios. The federal solar Investment Tax Credit (ITC) is the Federal Solar Tax Credit for businesses and is an important credit that helps make residential solar affordable for more homeowners in more places. The other credit is the Residential Federal Solar Tax Credit, which applies to individuals who install solar on a first or second residence (but not rental properties).
So you are aware, there is a tendency to refer to both federal credits as the "ITC" because both credits provide a similar tax benefit. However, you should know that only the business credit is truly the ITC, and that there are important distinctions between what is able to be claimed under either credit, when those claims can be made, and an entire body of law on how the IRS treats the credits differently. We’re going to explain the characteristics of the Residential Federal Solar Tax Credit for individual taxpayers.
In December 2020, the federal government extended both Federal Solar Tax Credits as part of the COVID-19 relief package. Both credits provide a similar tax benefit but they have some important distinctions that we will point out below.
In this article, we’re going to break down what the Residential Federal Solar Tax Credit is, how it works, what has changed about it, who is eligible to receive it, what you can claim to get it, how long you have to take advantage of it, when you can claim it, and where you can find more information about it. Let’s dive in.
What are federal solar tax credits?
The Residential Federal Solar Tax Credit is exactly what it sounds like: a credit for going solar that gives solar energy system owners a dollar-for-dollar reduction against their federal income taxes. It’s offered as an incentive to go solar because going solar is not just good for you, it’s beneficial for everyone.
How do federal solar tax credits work?
The specific tax credit percentage changes depending on when the system is installed. Previously, qualifying homeowners could receive a 30 percent tax credit as long as their solar energy system was installed and operational by December 31, 2019. If you didn’t get your system installed and ready to function in time, you could still qualify for the credit before 2022, but at a lower percentage value. This has changed as of December 2020.
Here’s how federal solar tax credits broke out before the change:
- 30 percent for systems in service by 12/31/2019
- 26 percent for systems in service on or after 1/1/2020 but before 12/31/2020
- 22 percent for systems in service on or after 1/1/2021 but before 12/31/2021
How have federal solar tax credits changed?
With the implementation of the COVID-19 relief package, the federal government chose to extend the credit by two years for owners of solar energy systems. (They also allocated new funding towards the research of energy storage and how to limit the reliance on fossil fuels.) The initial cutoff for a 30% credit remained the same (12/31/2019) but the applicable percentage for the subsequent years has changed.
Here’s how federal solar tax credits breaks out now:
- 30 percent for systems in service by 12/31/2019
- 26 percent for systems in service after 1/1/2020 but before 12/31/2022 (2-year extension)
- 22 percent for systems in service on or after 1/1/2023 but before 12/31/2023
Who is eligible to receive federal solar tax credits?
The Residential Federal Solar Tax Credit is available for individuals who own a solar energy system.
This credit is valid on first or second residential properties, but not on rental properties. This means that if you have a solar energy system and you paid for it out of pocket (or secured a loan to purchase it) you may be eligible for the Residential Federal Solar Tax Credit. This generally applies to homeowners who signed a Full Purchase Agreement or Monthly Loan Agreement.
If we installed the solar energy system on your home, but you do not own the equipment yourself, you will not be eligible for the credit. This mainly applies to homeowners who signed a Monthly Lease Agreement or Full Lease Agreement. In those cases, our company is the owner of the system and, thus, we can claim the solar ITC for businesses. It’s still a benefit to you though because the benefit from this credit is a part of why we can offer the low installation costs and great rates that make solar an option to so many people who aren’t interested in the purchase or loan options mentioned above.
What can I claim in order to get federal solar tax credits?
You can claim your solar panels, solar equipment, solar battery, and/or the cost of labor performed as part of the solar system installation process.
What is the timeframe to take advantage of federal solar tax credits?
We recommend referencing the time breakdown listed above, but here is another way of looking at it:
Residential Federal Tax Credit
|For systems installed:|
On or before December 31, 2019
January 1–December 31, 2022
January 1–December 31, 2023
On or after January 1, 2024
When can I claim federal solar tax credits?
When you file your income tax return for the applicable year. Just be sure to consult with your tax advisor and (according to the IRS) fill out Form 5695 as part of your tax return for the applicable year.
Where can I get more information about federal solar tax credits?
Again, we feel it’s always best to first speak with your tax advisor. They know your personal situation and can direct you on how to go about applying for and collecting your tax credit benefits. Aside from that, we like the resources provided by energy.gov. They are a credible organization and have a ton of great information that will go over solar tax credits in more detail for you.
Solar tax credit
Installing solar is an investment for today, next year and the long term. If you’re considering buying a home solar system, act today for a big tax incentive.