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The Inflation Reduction Act of 2022 includes various incentives for consumers to reduce carbon emissions. For homeowners, the newly expanded, extended and renamed residential clean energy credit offers big savings for installing a solar power system. Through 2032, you can get back 30% of your eligible expenses, including for solar panels, installation costs and battery storage, as a federal income tax credit.
How Does the Expanded Solar Tax Credit Work?
As with other tax credits, the residential clean energy credit, also called the federal solar tax credit, can decrease how much you owe in federal income taxes on a dollar-for-dollar basis.
For example, if you owe $2,000 in federal income taxes and have a $1,000 tax credit, you'll only have to pay $1,000. The tax credit is nonrefundable, however, so you can't receive a check if you owe less than the refund amount. Tax credits are distinct from tax deductions, which decrease your taxable income rather than how much you owe.
You Need to Meet All These Criteria
You must satisfy all these requirements to qualify:
- The solar power system was installed between January 1, 2017, and December 31, 2034.
- It's installed at your primary or secondary residence. If you own a condo or co-op you may also qualify. However, you don't qualify if you're a renter or you buy a solar system for a rental property.
- You own the solar power system. Some companies lease solar power systems to homeowners. You must purchase the system with cash or financing to qualify for the credit.
- It's a new system. You may be able to save money by buying a used installation, but doing so won't qualify you for this tax credit.
- Or, you bought into an off-site community solar project. These allow you to buy and use solar power without having to install a system directly on your home or property, although the investment's structure could limit your tax benefits.
Only Certain Expenses Qualify
If you qualify, the tax credit you receive will be based on your eligible expenses. These include:
- Solar panels and photovoltaic cells
- Balance-of-system equipment, which are the parts of your installation other than the paneling, such as wiring, inverters, a controller and mounting equipment
- Energy storage devices that have at least a three kilowatt-hours (kWh) capacity
- Labor costs
- Fees and inspection costs
- Sales tax
It's OK if your expenses are spread out over multiple years; you can still claim the expenses and credit for each year if you qualify.
It's Worth up to 30% of Your Eligible Expenses
If you qualify, the tax credit is worth 30% of your eligible expenses through 2033. For example, if you spend $20,000 on a new system, the credit is worth $6,000.
There are no income or maximum credit limits. However, the tax credit decreases to 26% in 2033 and 22% in 2034.
It's a Nonrefundable Tax Credit
This tax credit is nonrefundable, which means it can offset the taxes you owe but you won't get excess amounts as a refund. However, with this tax credit, you can roll over the unused portion of the credit to decrease your taxes in future years.
How Do You Take Advantage of the Solar Tax Credit?
Details for claiming the residential clean energy credit in 2023 may change as the tax filing deadline approaches. But if it's similar to the residential energy efficient property credit (the tax credit that was expanded and renamed under the new law), then you'll claim the credit by filing Form 5695 with your annual federal tax return. You use the same form to claim tax credits for other types of eligible energy-efficient expenses, including equipment for making power with wind, geothermal and biomass.
Could The Solar Tax Credit Save You Money?
The specifics will vary depending on the equipment you buy, labor costs and energy costs in your area. But the 30% tax credit is expected to save homeowners an average of $7,500 for a rooftop solar installation, according to Energy.gov, plus an average of $9,000 in energy cost savings over the system's lifetime. The installation may also increase your home's value, which could be helpful if you want to take out a home equity loan or line of credit in the future.
Look for Additional Rebates and Tax Credits
You may also qualify for additional incentives that reduce your overall expenses.
For example, some local municipalities and utility providers offer rebates, special financing or tax incentives (such as property tax exemptions for the system's value) that can save you money. States may also have separate rebate or tax incentive programs, and you may be able to stack the benefits from multiple programs.
You can search the North Carolina State University's Database of State Incentives for Renewables and Efficiency to see which programs might exist in your area.
Check Your Credit if You're Financing the Purchase
You can qualify for the residential clean energy tax credit even if you finance your purchase, but the credit doesn't apply to financing charges, such as origination fees or interest. Having good credit might help you get a loan with lower rates and fees, further increasing your overall savings.
Get your free credit score from Experian to find out where you're at and get suggestions for how you can increase your credit score. If you're looking for a personal loan, Experian can also match you with loan offers based on your credit profile.