How Does the Federal Solar Tax Credit Work?

Federal Solar Tax Credit text w/ $100 bills in background

UPDATED August 23, 2022

Since the solar Investment Tax Credit (ITC) was enacted by the federal government in 2006, the United States solar industry has seen a growth of more than 10,000%. Renewable energy is more available than ever before, a win for the planet and the economy.

Have you considered installing solar panels but are concerned about the upfront costs? The federal solar tax credit (also known as the Solar Investment Tax Credit or ITC) can help. This initiative can save you money as well as speed up the rate of return on your investment.

What is the federal solar tax credit? How does it work? And how can you reap the benefits? Let’s delve into the topic and answer some basic questions about the current federal tax credit for solar panels.

What is the federal solar tax credit?

The ITC is a credit against your tax liability for new residential and commercial solar panels to help cover the cost of your system. It is claimed on your federal income taxes and is a dollar-for-dollar credit that lowers for your federal taxes. This means if you claim a $6,000 federal tax credit, your federal income taxes owed are reduced by $6,000.

If your tax credit is larger than the amount of tax you owe you will not get a tax refund for the remainder. However, you can carry forward the remaining credit into a later tax year.

How long will the federal solar tax credit be available?

Since the solar Investment Tax Credit (ITC) was enacted by the federal government in 2006 it has changed several times. The most recent adjustment was part of the Inflation Reduction Act that was signed into law in August of 2022.

Due to this upgrade and extension of the credit, it now runs through 2034. It will disappear in 2035 unless Congress decides to renew it.

For residential systems the 30% credit lasts until December 31, 2032. It drops to 26% in 2033, then to 22% in 2034.

infographic showing ITC rate schedule

For commercial solar panel systems the current credit is also 30%, but it has a different step-down schedule. The credit in 2025 and later are contingent on whether the Dept. of Treasury determines carbon reduction goals are met. There are a few more options and variables with commercial systems that your Iconic Energy Solar Consultant will be happy to share with you.

What expenses are included in the federal solar tax credit?

You are able to deduct expenses such as:

  • The panels and cells themselves
  • The labor costs involved in onsite preparation, assembly, and installation. This includes permits, inspection, and developer fees
  • Balance-of-system equipment (i.e. wiring, inverters, and mounting equipment)
  • Energy storage devices for the associated solar panels (in the most recent law, eligible battery storage units that you install must store at least 3 kilowatts)
  • Sales taxes, if applicable

How much federal solar tax credit can I get?

The current credit rate for systems installed is 30% of your solar system cost. There is no maximum amount that can be claimed.

Who can claim the tax credit?

It’s available to all taxpayers for their primary or secondary residence located in the U.S. Businesses must be subject to U.S. federal income taxes to claim the credit.

NOTE: The solar tax credit is only available to newly purchased solar panel systems. If you lease a system you are not eligible for the credit.

You must take the credit for the year the installation is completed.

When is my solar installation considered completed? After a system is installed on your property, it is still subject to a final building inspection. This inspection must be passed. Once your solar system is approved, net metering is provided by your utility company. Your system will now be ready to start generating electricity.

Because of these last two requirements, some time will lapse between installation of your solar system by Iconic Energy and the first production of electricity.

Where can I find more information?

On our Resources page under “Federal Solar Tax Credits”, you will find a link to documents from the US Department of Energy. We encourage you to look these documents over carefully. NOTE: Because the ITC program was just updated in August of 2022 some of the references we link to have not yet updated their information.

If you would like in-person assistance as you invest in solar, please reach out to Iconic Energy through our Free Quote page. We offer free consultations and are happy to answer all your questions.

Whether you are looking to install residential solar or a large commercial utility grid, the solar professionals at Iconic Energy are ready to help. We are local and will be here before, during and after your solar panel installation. We also pride ourselves on the best warranty around! Learn more about our company here.