Purchasing and installing a solar system for your home can be expensive when you look at it from a short-term perspective. While these systems can save you a lot of money in utility bills in the long run, they usually require an initial investment of over $12,000. This number can put off even the most committed to saving the environment.
But do you know that you can receive an IRS solar tax credit based on the decision to install one for your home? This article discusses all you should know about the Federal Solar Tax Credit. Find out about eligibility and the steps you need to follow to claim this useful credit.
- What Is the Federal Solar Tax Credit?
- Benefits of the Tax Credit
- How Does It Work?
- Value of the New Solar Tax Credit
- Who is Eligible?
- How to Claim the Federal Solar Tax Credit
- Documents Needed
- What Happens Next?
- Can You Claim Other Tax Credits?
- Maximizing Your Savings with the Federal Solar Tax Credit
What Is the Federal Solar Tax Credit?
The Biden Solar Tax Credit, also known as the Residential Clean Energy Credit, is a program aimed at encouraging taxpayers to install solar systems in their homes. Backed by the Internal Revenue Service (IRS), this scheme offers a deduction from the income taxes owed to the IRS.
Benefits of the Tax Credit
The benefits of the Residential Clean Energy credit include the following:
- Reduced carbon footprint. As more American households opt for renewable energy, there will be less emission of greenhouse gases that affect the global climate.
- Improved property value. Installing a solar system on your property can improve its value in the real estate market.
- Likelihood of affordability. The tax credit also could lower the purchase and installation price of solar systems, as manufacturers will cater to many consumers.
How Does It Work?
The Federal Solar Tax Credit allows you – a taxpayer – to claim a credit for the amount you spent purchasing and installing a solar system. Thus, the tax credit offsets what you end up paying on your income taxes.
It is important to note that the tax credit differs from a tax refund. To claim a credit, you must owe taxes to the IRS, so the credit can cancel out some of the amount owed. If you do not owe taxes to the federal government, you will not receive any credit for installing solar panels.
Please note that this tax credit doesn’t apply to state or local taxes.
Value of the New Solar Tax Credit
The Federal Solar Tax Credit covers up to 30% of the costs of purchasing and installing a solar system on your home. There’s no maximum price cap on what you can claim on the tax credit. As long as you owe federal income taxes, you can claim 30% of the solar system expenses, regardless of how expensive they are.
What Does the Tax Credit Cover?
The Residential Clean Energy Credit covers the following expenses related to placing solar panels on your roof:
- Purchase of the panels
- Sales tax
- Labor costs
Who is Eligible?
You are eligible to claim the tax credit if you meet the following requirements:
- You installed your solar system between January 1, 2022, and December 31, 2032
- The solar systems have been installed and used on your primary or secondary residence
- You own the solar system installed in your home, whether you made upfront payments or financed the costs
You can sometimes claim the tax credit if you’re not a homeowner. However, this is only possible under certain conditions. You must either be a tenant-stockholder at a cooperative housing corporation or a member of a condominium complex with solar systems installed to file a claim for the credit.
You can also claim the tax credit if you recently installed a solar system on a new home. For instance, if you bought a home in 2021 but didn’t move in until 2022, you can claim the credit on your 2022 taxes.
You do not qualify for the tax credit if you lease your solar panels. However, the solar company you lease from may claim the tax credit to lower your monthly payments.
How to Claim the Federal Solar Tax Credit
These are the steps you need to follow to claim the inflation reduction act solar tax credit:
- Download the IRS Form 5695 as part of your federal tax return. You can download it from the official website
- On the form, calculate the credit on Part 1 of the Tax Form and file it under ‘qualified solar energy property costs’. On line 1, write down the overall solar project costs, and the 30% credit on lines 6a and 6b.
- Enter the same credit amount on line 15 of your Schedule 3 (Form 1040).
Remember that the tax credit only offsets what you owe in federal income taxes. If the tax credit you claim is more than what you owe, the credit will roll over year after year. You can only claim the credit once.
You will need the following documents when filing a claim for the Federal Solar Tax Credit:
- Receipts and invoices for the solar system purchase and installation
- Proof of residential ownership
- Building permits
- Solar system manufacturer certification
What Happens Next?
After filing a claim for the new solar on your tax return, the IRS will review and approve or deny your claim. If your claim is approved, the IRS will offset your income taxes, resulting in a lower tax bill.
However, if your claim gets denied, you will be notified of why it was denied and you will receive instructions on how to appeal.
Can You Claim Other Tax Credits?
Yes. Whether you file a claim for the new solar tax credit or not, you are entitled to other federal and state benefits and credits. You can claim Home Repair Loans and Grants, Earned Income Tax Credits, Adoption Tax Credits, and other benefits. Check out our website to learn about more benefits you can claim if eligible.
Maximizing Your Savings with the Federal Solar Tax Credit
The Federal Solar Tax Credit allows you to get up to 30% offset on your federal income taxes when you purchase and install solar systems on your roof. Designed to encourage taxpayers to embrace renewable energy, you can lower your carbon footprint and contribute towards a sustainable environment.
No matter how much you spend on your solar system installation, you can claim the 30% credit to lower your federal taxes. We hope the information we compiled has helped you see why you should look at the long-term benefits and apply for the Residential Clean Energy Credit.