The Inflation Reduction Act has improved the greatest solar incentive in the country a little bit. With the Residential Clean Energy Credit, often known as the Solar Tax Credit, homeowners will be able to get a tax credit equal to 30% of the cost of installing solar panels starting in August 2022.
In 2022, you might save tens of thousands of dollars on taxes thanks to the solar tax credit. In extreme circumstances, it may even totally wipe out your debt.
Although the majority of Americans are eligible for the solar tax credit, there are some important details you should be aware of before switching to solar. These include how it operates, what qualifies, and who can benefit from it.
Calculating how much the solar tax credit can save you in 2022
Let’s go over the fundamentals of figuring out how much money you can save with the solar tax credit before we get into the finer points.
The solar tax credit is worth 30% of the price of installing solar power in 2022. So, if your solar installation cost $20,000, you’d be qualified for a $6,000 tax credit. The original cost of the installation is not directly decreased by the tax credit. Instead, it reduces the amount of federal income taxes you owe. If you earn that $6,000 tax credit and owe $7,000 in taxes, your tax liability is reduced to $1,000. Easy to understand.
You can anticipate getting the entire 30% tax credit from this point forward until the end of 2032. The tax benefit, though, won’t last forever. The tax credit is reduced to 26% of installation costs beginning in 2033. The credit then decreases once again to 22% in 2034. The household solar tax credit offered by the federal government will be completely eliminated in 2035.
Using our solar tax credit calculator is the simplest method to accomplish this. We project the cost of a solar system for your home, any additional incentives you may be eligible for, and the amount of the federal solar tax credit you might anticipate receiving.
What if my tax credit is worth more than what I owe?
The solar tax credit is non-refundable, so if the value of your credit exceeds the amount of taxes you owe, you won’t receive a check or refund. However, that doesn’t imply that you won’t receive its full worth. Any remaining value will be carried over and used to reduce your taxes the following year.
Let’s say you put in solar panels and receive a $6,000 tax credit, but your federal income tax liability is only $4,000 instead. The remaining $2,000 of your tax credit will be applied to your taxes for the following year. Up to 5 years may pass before the tax credit expires.
How to qualify for the 30% federal solar tax credit in 2022
Most Americans will be eligible for the federal tax credit, as we have stated. However, there are several situations in which you might not be qualified. The following criteria must be met to be eligible:
- You must be the owner of the solar panel system.
- You must have a taxable income.
- The solar system must be installed at your primary or secondary residence.
- It must be claimed on the original installation of the project.
Owning your solar system: You cannot use the federal solar tax credit if you use a solar lease or a solar PPA because you do not own the solar system. You are the owner of the system, thus even if you utilize a solar loan to pay for your solar installation, you can still benefit from the tax credit.
What costs qualify for the federal solar tax credit?
The federal solar tax credit is able to pay for most, if not all, of the expenses related to installing solar panels. Costs that qualify include:
- Equipment: The cost of the solar panels, racking, wiring, and inverters.
- Contractor labor: the price of any permits, inspection fees, and labor necessary for planning, installing, and preparing the site.
- Sales tax: Any sales tax associated with the above costs is also covered by the tax credit.
Technically, solar installation tax credits are not the only ones available. The tax credit is also available for fuel cell systems, geothermal heat pumps, solar water heaters, and even tiny wind energy systems!
Are battery storage systems eligible for the federal solar tax credit?
Yes, the 30% tax credit applies to energy storage. The entire 30% credit will be available for battery systems and solar panels starting in 2022 as a result of the Inflation Reduction Act’s enactment.
You can anticipate a tax credit for energy storage of between $3,000 and $4,500 since household batteries typically cost between $10,000 and $15,000 to install. The cost of the battery will be included in the total cost of your solar installation if it is installed along with solar panels. In addition to solar installations, standalone batteries will also be eligible for the federal tax credit as of 2023.
In addition to solar installations, standalone batteries will also be eligible for the federal tax credit as of 2023. Additionally, batteries installed after 2023 must be at least three kWh in size. You probably won’t need to worry about the minimum capacity requirement because the majority of home storage batteries are approximately 10 kWh in size.
How does the solar tax credit work with state, local, and utility incentives?
There are other incentives for households who transition to solar power in addition to the federal tax credit. Other incentives can be available to you from your state government or even your power provider. The value of your federal solar tax credit may vary depending on the incentive type.
The value of the utility rebate will typically be deducted from your total costs before the federal tax credit is calculated if you receive one from your utility provider. Your tax credit’s value is lowered as a result.
As an illustration, imagine that you spend $20,000 to install a solar system and receive a $1,000 rebate from your energy provider. The tax credit would be calculated based on the price following the utility rebate rather than the initial $20,000 cost. This amounts to $19,000.
To determine how much your tax credit will be worth following a utility incentive, apply the calculation below:
30% x (Total system cost – Utility rebate amount) = Federal tax credit value
State solar tax credits and incentives
State government incentives, in contrast to utility incentives, typically do not need to be subtracted before the federal tax credit is determined.
As a result, the solar tax credit would be calculated based on the $20,000 system’s initial cost if you installed it and received a $1,000 state government rebate. In this instance, that entails that the tax credit would be worth 30% of $20,000, or $6,000 in federal tax credit. As a result, you would receive a total of $7,000 in rewards.
The same is true of state tax breaks. However, receiving a state tax credit will result in you having more taxable income on your federal tax returns since you won’t be able to deduct as much from your state income taxes. State tax credits are now available in 10 states, including Arizona, Massachusetts, and New Mexico.
The best time to claim the solar tax credit is now
To use the full 30% tax credit, you have around ten years. It doesn’t necessarily make sense to wait 10 years just because you can. Almost always, it is wise to make an investment as soon as possible. You may start saving money early by installing solar as soon as possible, which will enable you to stop paying expensive electricity bills and start allocating your funds to the things that are truly important to you.
Not to mention, investing in solar energy is presently better than it has ever been. The federal tax credit might end well before other solar incentives around the nation. Consider net metering, a program that reimburses you for the full cost of the electricity you use and transmit to the grid as solar energy. In every state in the union, utilities are abandoning net metering and paying solar consumers less for solar electricity.
To ensure that you obtain the maximum solar savings possible, you’ll want to install solar before things like net metering and utility incentives start to expire. To start saving money on your electricity bills, check out the incentives that are offered in your area with our solar panel savings calculator. Don’t let the chance to save the most disappear!