Residential Home Energy Tax Credits Guide

What is a tax credit?

A tax credit is a dollar-for-dollar reduction in the amount of income tax that you would otherwise have to pay. For example, claiming a $1,000 federal tax credit reduces your federal income taxes due by $1,000. The federal tax credit is sometimes called the investment tax credit, or ITC, although it differs from the ITC that is offered to companies that own solar systems.

What is the federal solar energy tax credit?

The federal residential home energy tax credits can be claimed from federal income taxes for a percentage of the cost of a solar photovoltaic system. (Other types of renewable energy are also eligible for similar credits, but are outside the scope of this guide.)

The system must be commissioned during the fiscal year and generate electricity for a home located in the United States. There is no clear line from the Internal Revenue Service (IRS) on what constitutes “commissioning into service”; however, the IRS has equated it with a full install.

In December 2020, Congress approved an extension of the ITC, which provides a tax credit of 26% for systems installed between 2020 and 2022, and 22% for systems installed in 2023. The tax credit expires in 2024 unless Congress renews it.

There is no maximum amount that can be claimed.

Am I eligible to claim the federal solar energy tax credit?

You may be eligible for this tax credit if you meet all of the following criteria:

Your solar PV system was installed between January 1, 2006, and December 31, 2023.
The solar photovoltaic system is located at your primary or secondary residence in the United States, or for an off-site community solar project, if the electricity generated is credited and does not exceed your household’s electricity usage. The IRS has allowed a taxpayer to claim a section 25D tax credit for the purchase of a portion of a community solar project.
You own the solar PV system (meaning you purchased it with cash or financing, but you are not renting or in an agreement to purchase electricity generated by a system you do not own).
The solar photovoltaic system is new or is being used for the first time. The credit can only be claimed on the “original installation” of the solar equipment.
What expenses are included?
The following expenses are included:

  • Photovoltaic solar panels or photovoltaic cells that are used to power an attic fan (but not the fan itself).
  • Contractor labor costs for original site preparation, assembly, or installation, including permit costs, inspection costs, and developer fees.
  • System balance equipment, including cabling, inverters, and mounting equipment.
  • Energy storage devices that are charged exclusively by associated solar photovoltaic panels, even if the storage is placed in service in a fiscal year after the solar energy system is installed (however, energy storage devices are still subject to installation date requirements).
  • Sales tax on eligible expenses

How does the federal tax credit affect the other incentives I receive?

For up-to-date incentive information, including incentive-specific contact information, visit the State Incentives Database for Renewable Energy and Energy Efficiency website.

REIMBURSEMENT FROM MY ELECTRICAL UTILITY COMPANY TO INSTALL SOLAR POWER

Under most circumstances, subsidies provided by your electric utility company for you to install a solar photovoltaic system are excluded from income taxes through an exemption in federal law. In this case, the utility reimbursement for installing solar is subtracted from your system costs before calculating your tax credit. For example, if your solar PV system was installed before December 31, 2022, cost $18,000, and your electric utility company gave you a one-time $1,000 rebate for installing the system, your tax credit would be calculated as follows:

0.26 * ($18,000 – $1,000) = $4,420

PAYMENT FOR RENEWABLE ENERGY CERTIFICATES

When your electric utility company, or another buyer, gives you cash or an incentive in exchange for renewable energy certificates or other environmental attributes for the electricity generated (either in advance or at a set time), the payment is likely to be will be considered taxable income. If that is the case, the payment will increase your gross income, but will not reduce the federal solar tax credit.

REFUND FROM MY STATE GOVERNMENT

Unlike rebates from electric utility companies, rebates from state governments generally do not reduce your federal tax credit. For example, if your solar PV system was installed before December 31, 2022, the installation costs totaled $18,000, and your state government gave you a one-time $1,000 rebate for installing the system, your federal tax credit would be calculated as follows :

0.26 * $18,000 = $4,680

STATE TAX CREDIT

State tax credits for installing the solar PV system generally do not reduce federal tax credits and vice versa. However, when you receive a state tax credit, the taxable income you report on your federal taxes will be higher because you now have less state income tax to deduct. The Tax Cuts and Jobs Act of 2017 placed a $10,000 limit on the state and local tax deductions, which may have an impact if a state tax credit affects federal taxable income. The end result of claiming a state tax credit is that the amount of the state tax credit is actually taxed at the federal tax level.

For example, the net percentage reduction for a New York homeowner claiming both the 25% state tax credit and the 26% federal tax credit for an $18,000 system is calculated as follows, assuming a tax rate on 22% federal income:

0.26 + (1 – 0.22) * (0.25) = 45.5%

Note that because the reduction in state income taxes increases the federal income taxes paid, the two tax credits do not add (ie, not 25% + 26% = 51%). For an $18,000 system, the total cost reduction in this example would be:

[$18,000 * 0.26] + [$18,000 * (1 – 0.22) * (0.25)] = $4,680 + $3,510 = $8,190

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