Note: The information below applies for people whose solar panel installations were fully interconnected and placed into service before midnight on January 1, 2020. The Federal Solar Tax Credit has now “stepped down” from 30 to 26 percent for all installations completed in 2020. The rest of this page applies to home solar installations completed during 2020.
The federal solar tax credit, also known as the Solar Investment Tax Credit, or ITC, is the single most successful and important solar incentive available in the United States. The ITC is a direct tax credit based on the cost to install a solar system, awarded to the system owner in the year after installation.
If your solar panel installation is fully interconnected and you receive permission to operate (PTO) before January 1st, 2021, you are entitled to a tax credit of up to 26% of your cost to install solar. If your system gets PTO in 2021, you’ll earn a 22% tax credit instead.
The solar tax credit is set to expire for all residential installations completed after 2021.
But that’s not all there is to learn. Let’s dive in to other important questions people have about the federal solar tax credit!
How the solar tax credit works
The ITC is a non-refundable tax credit, meaning you can’t take it unless you owe at least as much in income taxes as the credit would be. For example, the average-sized home solar installation can make about 6.7 kilowatts of power under full sun, and costs about $22,000 (about $3.30 per watt) before state solar incentives.
For that average system, the federal solar tax credit would be $5,720 (26% of $22k).
In order to take the full tax credit, you’d need to have a federal tax bill of at least $5,720. If you don’t owe that much in taxes, you can still take the full credit, but you’ll need to claim it over more than one year.
Note: when we say “federal tax bill” it doesn’t mean “what you owe on April 15th.” Instead, it means “total tax liability,” so if you pay in all year through pay check deductions, that money counts as taxes paid. If that amounts to $5,720, you can claim the whole credit.
And you don’t have to be rich to claim the solar tax credit. If you take the standard deduction and no other tax credits, you can probably claim the full solar ITC as a single person making more than $60,000, or a married couple making over $80,000.
Ready to install solar?
If you’re thinking about going solar and you want to know how the solar tax credit can benefit you, get in touch with one of our solar experts today.
If you’ve already installed solar, here’s some guidance on how to claim the solar ITC.
If you’d like to know answers to important questions about the tax credit, read on!
Without further ado, here is our solar tax credit FAQ:
- Q: What is the solar tax credit?
- A: Officially called the “solar investment tax credit” or ITC, it’s a dollar-for-dollar reduction in the federal tax bill of any homeowner who pays for a solar installation.
First enacted in 2005 and renewed in 2008 and 2015, the ITC is offered by the U.S. federal government for homeowners and commercial solar businesses to make solar more affordable.
- Q: How much do I get back from the solar tax credit?
- A: 26% of your costs to install solar, if you install before the end of 2020.
If you’re a homeowner who buys a solar panel system, you’re entitled to a tax credit of up to 26% of the total cost of that system. You can wipe out your entire tax bill if your credit is high enough, and you can take the credit over multiple years if you don’t owe that much in year 1. For example, if you spend $20,000 on a solar system, your 26% tax credit would be $5,200. But if you only owed $4,600 in taxes for the year, your tax bill will be reduced to zero, and you’ll receive an additional $600 tax credit on next year’s return.
- Q: When will the solar tax credit expire?
- A: Nope! The residential solar tax credit will continue at 26% through the end of 2020, then “step down” to 22% in 2021 and expire afterward.
Here’s what that looks like:
That permanent 10% credit after 2022 will be given to companies who install and maintain solar systems and sell the power to another entity (homeowner, business, utility company, etc.) Of course, this assumes the Trump administration doesn’t decide to do away with the tax credit…
- Q: How do I claim the solar tax credit on my 1040 form?
- A: Complete and file IRS form 5695 along with your return. Check out our full guide to claiming the ITC right here.
Claiming the credit is actually really easy, and like we mentioned above, it can wipe out your entire tax bill. Wow!
- Q: Why are we subsidizing solar anyway? Shouldn’t the industry stand on its own two feet?
- A: Lots of businesses get subsidies from the government, and solar is one of the most important future planning technologies there is!
We subsidize solar because it’s a key part of our nation’s plan to get off fossil fuels and help make a more reliable, sustainable energy future. But the ITC does more than that; the taxpayer investment in solar creates jobs, reduces prices for solar for everyone, and ensures this still-new industry grows large enough to sustain itself for long into the future.
Check out this handy graphic from the Solar Energy Industries Association (SEIA):
That’s a lot of benefit for our tax dollar investment, but it doesn’t even tell the whole story. A study conducted a few years ago by the U.S. Partnership for Renewable Energy Finance found that a dollar invested in reducing the cost of solar today returns an annual rate of 10% over a 30-year term, if you account for tax revenue from jobs created and leases and Power-Purchase Agreements (PPAs). That’s a huge rate of return, even as solar also saves homeowners money by reducing their electricity bills over 25 or 30 years!
And here’s another graph to put things in perspective a bit. The world’s top 20 countries by economic power (aka the G20) spend almost 4 times the amount on oil subsidies as the entire world spends on subsidies for renewable energy. Check out this chart:
We hope you enjoyed reading our solar tax credit FAQ. Please feel free to pose additional questions in the comments section below, and we’ll incorporate the best ones in the body of this post.
Head on over to our post about how to claim the ITC:
Last modified: February 4, 2020