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How To Save on Solar Energy with Federal Tax Credits

4 minute read

By Alannah Koene

Solar power energy provides benefits such as low pollution, energy savings and a reduced carbon footprint. In an effort to encourage people to install solar power in their homes, the U.S. government introduced federal solar tax credits for new residential and commercial systems in 2006. This tax credit can help to offset equipment and installation costs.

This article discusses how the federal solar tax credit works, what it covers and who is eligible to claim it.

What Is a Tax Credit?

A tax credit is an amount of money that taxpayers can use to reduce the amount of money they would otherwise owe. Tax deductions are different as they reduce the amount of taxable income rather than taxes due. Furthermore, deductions reduce final tax liability within an individual’s tax rate, and tax credits reduce owed taxes dollar-per-dollar.

Federal and state governments grant tax credits to eligible individuals or organizations to encourage practices that benefit the environment, economy and other important avenues.

Federal Tax Credits for Solar Energy

The U.S. government introduced the federal residential solar energy credit, also called the Investment Tax Credit (ITC), in 2006. The solar energy industry has only grown since then, accounting for 50% of all new electricity-generating capacity added in the U.S. at the beginning of 2022.

Individuals who purchase and install a solar photovoltaic system can claim the federal residential solar energy credit. This tax credit covers a percentage of eligible solar power installation costs and lowers your tax bill. It’s a nonrefundable credit, which means the dollar amount is deducted from tax liability only until taxes due are $0 and any excess credit isn’t paid out.

To qualify for the tax credit, the system must be placed in service during the same tax year and generate electricity for a home in the U.S. The IRS designates placed in service systems as those with completed installations.

As of the Consolidated Appropriations Act of 2021, the government extended tax credits for solar energy systems but featured a gradual step down in credit value. The tax credit values are:

The tax credit expires after December 31, 2023, and is not set for renewal. Although the tax credit only covers a portion of costs, there’s no maximum amount for claims.

Average % Savings From Solar Energy in the U.S.

Solar power helps reduce your carbon footprint but can also bring down your power bill. Solar systems can cost up to $17,000, but the federal solar tax credit and power bills can lead to net savings.

Americans save approximately $1,500 per year by switching to solar energy, which works out to $37,500 over 25 years. Additionally, a 26% tax credit can save $4,420 on a $17,000 solar-powered system and result in only $12,180 for installation. When you divide the installation cost by average yearly savings, solar energy starts to pay for itself after about eight years.

Overall savings can vary from $10,000 to $90,000. The actual savings estimate depends on factors such as local grid prices, roof size, location, state incentives and energy usage.

Eligibility for Federal Solar Tax Credit

Individuals may be eligible for the tax credit if they meet the following criteria:

The federal solar tax credit covers the following expenses:

How To Claim the Federal Solar Tax Credit

To claim the federal solar tax credit:

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Alannah Koene

Contributor

Alannah Koene is a content writer based in Victoria, British Columbia. Although she writes for a range of topics, her professional writing often focuses on business, health, and lifestyle. Spending much of her time exploring the outdoors through sport, Alannah aims to share her perspectives through writing and content. She’s happiest reading a book in her hammock with her dog napping nearby.