Disclaimer: This article is intended to provide information on the federal investment tax credit for those interested. It does not constitute professional tax advice or other financial guidance, nor should it be the only source of information when making tax-related decisions.
So, you’re interested in going solar and keep seeing conflicting terms about the tax incentives. Some call it a “coupon,” “tax refund,” “solar tax credit,” “ITC,” or even a “tax break.” The most accurate and correct term for the incentive is an investment tax credit (ITC). In that, it is a dollar-for-dollar reduction in the amount of income tax you would otherwise owe. No one shows up to your door dressed up as Uncle Sam with a huge check and camera – you simply don’t have to pay what you otherwise would. Let’s check out an example.
It’s Tax Time
The federal government says you owe $5,000 in taxes. Luckily you went solar, filled out the form 5695 and received an ITC of $5,000. The amount you now owe in federal taxes has dropped to $0.
If your ITC is $5,000, but only owe Uncle Sam $2,000 in federal taxes, then the remaining $3,000 credit will be applied to future years.
Now let’s consider some other factors about the ITC.
Get the Most Out of the ITC
The two great things about the ITC are: there’s no maximum amount that can be claimed and the cost of assembly of installation is included. This means if you need a new roof or structure (carport, pergola, patio, etc.) in order to install the solar panel system, it can be included in the ITC – that’s like a 30% coupon for a patio!
The solar ITC decreased to 26% in 2022, but thanks to the Inflation Reduction Act, the ITC has returned to 30% until 2032. The ITC now applies to battery backups too. The pre-IRA ITC sort of applied to backup power when done at the same time as the solar panel installation. In the same way a carport, patio, or ground mount would come with the tax credit.
Now, homeowners that already went solar can get battery backups added and will see the 30% tax credit applied. This is great news for anyone looking to add energy storage to their power supply sources or just want a battery backup. The energy storage system would need to provide at least five kWh of storage, so no one Enphase Encharge 3 battery; you would need at least two. This isn’t too big of a deal because one would only power like, a bedroom with no HVAC.
Example of IRA Changes
The 4% increase in ITC is a nice dollar-sign bag of change. For example, in the Pre-IRA ITC, an 8kW system capable of bringing a $150 CPS Energy bill down to just the service the fee would cost around $25,000 before the $2,500 CPS rebate and ITC.
Pre-IRA ITC: 0.26 x ($25,000-$2,500) = $5,850
IRA ITC: .3 x ($25,000-$2,500) = $6,750
That’s an extra $900 off in taxation. If you aren’t sure how tax credits work, check out our article on the subject.
Plus Backup Power
The ITC now applies to battery backups too. The pre-IRA ITC sort of applied to backup power when done at the same time as the solar panel installation. In the same way a carport, patio, or ground mount would come with the tax credit. Now, homeowners that already went solar can get battery backups added and will see the 30% tax credit applied. This is great news for anyone looking to add energy storage to their power supply sources or just want a battery backup. The energy storage system would need to provide at least five kWh of storage, so no one Enphase Encharge 3 battery; you would need at least two. This isn’t too big of a deal because one would only power like, a bedroom with no HVAC.
Things to Consider
When it comes to taxes, there are a lot of exceptions. The ITC is no different. First off, in order to qualify for it, the solar panel system needs to be installed after January 1st, 2022 and before December 31st, 2032. Installation time can vary greatly on permit time (HOA, utility company, etc). Not until Solar Edge Pros receives permission from all involved agencies can we begin installation, and the actual install takes less than a day (find out more about the installation timeline here. So it’s best to sign the contract to go solar at least three months before 12/31 in order to qualify.
The ITC only applies on the original installation. So, if you purchased a small system, then later decided you wanted more panels, the tax credit would not apply on the ones added. You save more by going solar once. We recommend considering your home’s future electrical use when going solar:
Are you expecting children to move out in the next five to ten years?
Are you expecting to add a pool to the property?
Will you be working from home more?
Schedule an appointment with one of our knowledgeable consultants to see how we can help save you the most on your electric bill.
In Conclusion…
The ITC is a huge discount for those that qualify. You will owe less in federal taxes by going solar as demonstrated in our example. Backup power without solar can qualify for the ITC now. Just like before 2022, the credit applies the year of installation, which the entire process takes one to three months. Lastly, lots of factors to consider when trying to maximize the credit without spending too much. Meeting with an experienced solar consultant can help understand how to save the most money.
Additional Resources
Solar Tax Credit FAQs
As of 2022, the solar installation tax credit is 30%. The tax credit also applies to the cost of materials for installation including a patio, carport, or ground mount.
Here’s an example: It’s tax time. Uncle Sam hits you with a federal bill of $2,000 in taxes. Luckily you went solar, filled out the form 5695 and received an ITC of $2,000. The amount you now owe in federal taxes has dropped to $0. If your ITC is $5,000, and you only owe Uncle Sam $2,000 in federal taxes, the remaining $3,000 credit will be applied to future years.
No. The tax credit only applies to the initial installation.
Yes. The tax credit will apply to any energy storage system that provides more than 5kWh of power.
No. There are many factors that could deem someone ineligible for the tax credit. Please consult a financial advisor for information on your particular case.
