Solar Tax Credit By State In 2022: What You Need To Know (2023)

Installing your own solar power system can be an intimidating process, especially for your wallet. Adding one to your home is a significant investment—on average, solar panels cost about $16,000.

But, home solar power systems can save you a significant amount of money in the long term. Plus, there are several rebates and tax credits to help encourage homeowners to take the plunge and begin producing renewable energy. There are benefits at the federal, state and local level that may earn you money back for installing a qualifying system.

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(Video) The Solar Tax Credit Explained [2022]

What Is A Tax Credit?

Tax credits are a powerful tool that can help you reduce your taxable income and directly impact your annual tax bill.A dollar-for-dollar reduction of the income tax you owe, a tax credit can reduce the amount of tax you owe or increase your tax refund. They also differ from deductions and exemptions.

What Is the Federal Solar Tax Credit?

Installing solar panels earns you a federal tax credit. That means you’ll get a credit for your income taxes that actually lowers your tax bill.

The federal government enacted the solar Investment Tax Credit (ITC) in 2006. In the years since, the U.S. solar industry has grown by more than 10,000% with an average annual growth of 50% over the last 10 years. The industry has created hundreds of thousands of jobs and invested billions of dollars in the U.S. economy

You can qualify for the ITC for the tax year that you installed your solar panels as long as the system generates electricity for a home in the United States.

In 2021, the ITC will provide a 26% tax credit for systems installed between 2020 and 2022, and 22% for systems installed in 2023. So, when you’re deciding on whether or not to install solar panels, factor in a 22% to 26% discount.

How Does The Federal Solar Tax Credit Work?

When you purchase a solar photovoltaic (PV) system during the tax year, you are eligible for a Federal Solar Tax Credit that can be claimed on your federal income taxes for a percentage of the cost of the system.

Solar Tax Credit Eligibility

You can qualify for the ITC as long as your solar system is new or being used for the first time between January 1, 2006 and December 31, 2023. Unless Congress renews the ITC, it expires in 2024.

Other requirements include:

  • You must own the system outright (not lease it)
  • The system must be located in the United States
  • The system must be located at your primary or secondary U.S. residence or for an off-site community solar project

Solar Energy System Eligibility

To be eligible for the Federal Solar Tax Credit, you must install a solar energy system that provides electricity for a residence, such as solar water heaters or a solar photovoltaic (PV) system. Since solar water heatersuse the sun’s thermal energy to heat water and solar photovoltaic (PV) systems convert the sun’s light energy into electricity, both systems will qualify for the Federal Solar Tax Credit.

Solar Water Heaters

Solar water heaters are a cost-effective way to generate hot water for your home. Offered in various designs that include a solar collector and storage tank, solar water heaters use the sun’s thermal energy to heat your home’s water.

Solar Panels (Photovoltaic Systems)

Solar panels, also known as photovoltaic (PV) panels, are flat constructions resembling windows that convert light from the sun (in the form of energy particles known as photons) into electricity. Offered in three types such as monocrystalline, polycrystalline and thin-film, solar panels can significantly reduce your electricity bill.

How To Claim Solar Tax Credit

Following your solar power installation, you can only claim the solar tax credit once. To claim the credit, you must fileIRS Form 5695 as part of your tax return. You can also carry over any unused amount remaining on your tax credit that you could not claim in a single tax year.

State Solar Incentives

Several states and Puerto Rico offer solar incentives in addition to the federal ITC to encourage homeowners to install solar. Each state has different incentives in place, but there are a few common ones: tax credits, rebates and renewable energy certificates. States with a high number of solar incentives include California, Texas, Minnesota and New York.

(Video) Solar Tax Credit Extension 2022 - What You Need to Know

Each state has its own set of solar incentives that vary significantly. Different agencies offer different solar financial incentives, so talk to your installer and consult the Database of State Incentives for Renewables & Efficiency for specifics.

State Tax Credits

State tax credits work in the same way that the federal ITC does, but for your state taxes. Exact amounts vary significantly from state to state, and they generally don’t reduce your federal tax credits.

State Government Rebates

Some states offer upfront rebates for installing a solar power system. They are typically only available for a limited time while funds are available, so research rebates in your state to get in on the incentive before it runs out. A state government rebate can reduce your solar costs by 10% to 20%.

Solar Renewable Energy Certificate

A Solar Renewable Energy Certificate (SREC), sometimes referred to as a Solar Renewable Energy Credit, is another type of state-level solar incentive. After you install your solar power system and register it with the appropriate state authorities, they will track your system’s energy production and periodically offer you SRECs as a benefit. You can sell your SREC to your local energy utility (or another buyer) to provide payment that’s typically considered taxable income.

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(Video) Solar Tax Credit Extended

Other Incentives

Local Utility Rebates

Local utilities often provide some financial incentives to encourage local homeowners to install solar power systems. Some offer rebates on energy bills based on how much energy the system produces, while others provide one-time subsidies to install a solar power system.

Incentives that pay you a per kilowatt-hour credit for the power that your system produces are known as PBIs, or performance-based incentives.

Subsidized Loans

Your state, local utility, or another non-government organization may offer subsidized loans to help you finance the purchase of your solar panel system. Before you purchase your system, discuss options for subsidized loans with an installer in your area—they’re likely to know every solar program available locally.

Tax Exemptions

In addition to tax credits, you may be eligible for certain tax exemptions after you install a solar system. Despite the fact that these systems will increase your property value, some states and municipalities will not include them when assessing property taxes, which means your property tax bill will not go up with solar installation.

Some states also have programs to ensure all purchases of solar power system components are exempt from state sales taxes, which could save you hundreds of dollars when you go to install your system.

Bottom Line

Combining these various solar tax credits and other financial incentives can save you money on your solar power system installation. While installing one requires a significant amount of money upfront, these programs will greatly reduce the system’s overall cost.

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THIS IS AN ADVERTISEMENT AND NOT EDITORIAL CONTENT. Please note that we do receive compensation for any products you buy or sign up to via this advertisement, and that compensation impacts the ranking and placement of any offers listed herein. We do not present information about every offer available. The information and savings numbers depicted above are for demonstration purposes only, and your results may vary.

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(Video) 2022 Solar Tax Credit Explained

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FAQs

What proof do I need for solar tax credit? ›

Form 5695 is the document you submit to get a credit on your tax return for installing solar panels on your home.

How do I get the 2022 solar tax credit? ›

First, download IRS Form 5695 as part of your tax return. Then, on Part I of the tax form, calculate the credit. You file your solar system as “qualified solar electric property costs.” Then, on line 1, enter your project's total costs as written in your solar contract. Complete the calculations on lines 6a and 6b.

How do I get full benefit of solar tax credit? ›

Due to the Inflation Reduction Act, the federal ITC has jumped up to 30% for all systems installed in 2022. To claim the solar tax credit, you'll need to first determine if you're eligible, then complete IRS form 5695 and finally add your renewable energy tax credit information to Schedule 3 and Form 1040.

Is there a tax credit for solar panels in 2022? ›

Those who install a PV system between 2022 and 2032 will receive a 30% tax credit. That will decrease to 26% for systems installed in 2033 and to 22% for systems installed in 2034. If you've already installed a system in 2022, your tax credit has increased from 22% to 30% if you haven't already claimed it.

How does solar tax credit work if I get a refund? ›

If you paid $5,000 and your tax refund is $3,000, you now only paid $2,000 in taxes. You solar tax credit cancels out that $2,000 and adds it to your refund check. The remaining $1,000 solar tax credit will be deducted from next year's taxes or whatever year you owe again.

How does the solar 26% tax credit work? ›

The investment tax credit (ITC), also known as the federal solar tax credit, allows you to deduct 30 percent of the cost of installing a solar energy system from your federal taxes. The 30 percent tax credit will be available until 2033, at which point it will drop to 26 percent.

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