How To Receive Federal Tax Credits For Solar Installation

As electricity prices continue to rise and being friendly to the environment becomes more popular, homeowners are increasingly looking for alternative ways to supply energy for their homes. A popular alternative is solar energy – more specifically solar powered photovoltaic systems (PV), where sunlight is directly converted into electricity.

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The attraction of solar PV systems is that the electricity they produce is free and they create no pollution. However, the PV equipment and installation is not free and can be quite expensive. In order to encourage homeowners to switch to clean PV produced electricity, the US federal government offers a financial incentive, known as the federal residential solar energy tax credit. This tax credit reduces the amount of income tax the eligible homeowner would otherwise pay. It is a dollar for dollar credit – it “erases” the full credit amount from the total of income tax due – it is not just another deduction from your income.

This tax credit incentive is specifically for solar PV systems, where the solar panels contain PV cells and convert the sunlight into usable electricity for the home. This is different than solar panels that are just basically solar heaters that supply hot water and not electric power. It also should be noted that this tax credit incentive is not permanent, it is a temporary government program. Details regarding this and the tax credit’s benefits are discussed below.


Basic Qualifications

Eligibility for the residential solar federal tax credit is based on meeting all of the following criteria:

• Your solar PV system is fully installed and operational by December 31, 2023.

• The solar PV system is located at and used to power your primary OR secondary residence located in the United States.

• You own the solar PV system, meaning you purchased it outright from the start with or paid through financing, but you are neither leasing nor renting the PV system.

• The solar PV system is new and being used for the first time. The credit can only be claimed on the “original installation” of the solar equipment.

Benefits of Solar Installation

There are several financial benefits from PV installation. Some of the most significant benefits include:

– Reduced energy bills: Installing solar panels can significantly reduce your energy bills. Solar panels generate electricity from the sun, which means that you will rely less on your utility company for electricity. This can result in substantial savings over time.

– Increased home value: A solar panel system can increase the value of your home. A study conducted by the National Renewable Energy Laboratory found that homes with solar panels sold for an average of 4.1% more than homes without solar panels.

– Environmental benefits: Solar energy is a clean and renewable source of energy that does not emit harmful greenhouse gases. By installing solar panels, you can reduce your carbon footprint and contribute to a cleaner environment.

– Tax incentives: The federal government offers tax incentives to homeowners and businesses that install solar panels. These tax incentives can help offset the cost of installing a solar panel system.

Amount of Tax Credit and How To Receive It

– For PV systems installed and made operational by Dec. 31, 2022: 26% Tax Credit
– For PV systems installed and made operational by Dec. 31, 2023: 22% Tax Credit

The credit is dollar for dollar against any income tax liability you have for the given year, for example if you place a PV system into service during 2022, your tax credit would be 26% of eligible expenses. If these expenses were $10,000, your tax credit would be $2,600 – which would be applied towards any taxes you owe with you 2022 tax return. Thus, if your tax return shows that you owe $3,000 – you can fully apply the tax credit of $2,600 – and only have to pay the IRS the remaining $400 balance.

However, this tax credit is not a “refundable” or cash type of credit. It can only be applied to the taxes you have due on your tax return. If the credit amount is higher than your taxes due, the remaining credit amount will not be paid to you, but it can be carried over to the next tax year. You can apply for and receive this tax credit by completing and attaching IRS Form 5695 to your federal tax return (Form 1040 or Form 1040NR).

Financially Smart Investment

Homeowners can save approximately $1,500 per year by switching to solar energy, which works out to $37,500 over 25 years. Additionally, a 26% tax credit can save $4,420 on a $17,000 solar-powered system and result in only $12,180 for installation. When you divide the installation cost by average yearly savings, a solar energy PV installation can pay for itself after about only eight years, and even faster in many cases.

In addition, as previously mentioned, the value of your home usually will increase after installing a PV system. At only a conservative 2% appreciation rate, that equals $2,000 extra equity for each $100,000 of your home’s value. Also, having a PV system provides “insurance” against prolonged power disruptions, which provides peace of mind and extra security.

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