Solar Tax Credits: What are They and How Do They Work?

On top of lower energy bills and a reduced carbon footprint, homeowners who opt for solar- powered homes enjoy benefits such as saving thousands of dollars in solar tax credits. Solar tax credits are valuable incentives for consumers who purchase solar power systems for their homes.

These tax credits are available through the federal government, the state, and local property tax exemptions. Tax credits are just one of the many renewable energy incentives available to encourage homeowners to make the switch.

Federal Tax Credits

As a way to encourage more homeowners across America to make the switch from fossil fuels to renewable solar power, the federal government currently offers a significant incentive: a 30% solar tax credit. The Residential Renewable Energy Tax Credit, or the Federal Investment Tax

Credit was originally set to expire in 2016, but Congress passed a bill that extends the deadline an additional eight years. The 30% tax credit will run through 2019, after which time it will fall to 26% in 2020, 22% in 2021, and 10% in 2022. This credit has no limit.

How to Cash in Your Federal Solar Tax Credit

A tax credit is a dollar-for- dollar reduction of the income tax a homeowner owes to the government. Solar energy system rentals do not qualify for the federal tax credit, as only the equipment’s owner can cash in on this incentive. To qualify for the 30% tax credit, a homeowner must purchase a photovoltaic system that provides electricity to the residence. The system must meet certain industry code requirements. Second homes qualify, but rental homes do not. You must own the home and use it as a residence.

Receiving your 30% solar tax credit is simple. File Form 5695 with your annual tax return. This form is for residential energy credits. Fill out the costs of your qualified solar panel systems, as well as other solar power appliances. These may include:

  • Solar water heaters
  • Small wind turbines
  • Geothermal heat pumps
  • Fuel cell property

List the amounts you spent on each item, and continue filling out the form according to directions. Include the form when you file your tax return and the IRS will issue your tax credits accordingly. Residents should calculate their 30% federal tax credits after any state or local rebates. These rebates are nonrefundable. Consult a tax professional if you have any questions or concerns regarding Form 5695 or your tax return.

State and Local Tax Credits

The Public Utilities Commission developed a rebate program for certain residential renewable energy systems. Each state offers its own incentives and benefits for switching to solar.

California has 182 different incentives, while West Virginia only offers 11. The Database of State Incentives for Renewable Energy (DSIRE) Program is the nation’s best source of information on state and citywide incentives for renewable energy. This database tracks changes in real time at the state, utility, and community level.

Conduct a search to find out what kind of incentives your state offers for installing solar panels on your home. Once you find your state, browse through the available incentives to see which you qualify for. Some are residential, while others are for commercial properties. Local governments in many cities have initiated rewards programs and tax exemptions for residencies and businesses that install solar power systems. Find the link to the documents you need to file to apply to a state or local incentive through the DSIRE website.

Solar power saves the state energy costs and can significantly reduce harmful pollutants in the atmosphere that fossil fuels cause. Tax credits are just one way federal and state governments encourage homeowners to invest in solar power systems. If you’re contemplating installing a solar power system in your home, remember that the initial cost typically isn’t what you’ll actually pay. Thanks to the numerous incentives, rewards, and rebates available for energy- efficient homeowners, your bill will shrink to a fraction of its original size.