Solar Energy and the Taxman: How the Solar Panel Tax Credit Can Help You Save Money

As the CEO of Abundant Energy Experts, I've seen firsthand the benefits of solar energy for individuals and businesses. One of the most significant incentives available for those who invest in solar panels is the solar panel tax credit. In this blog post, we'll discuss how the solar panel tax credit works and how it can help you save money.

The solar panel tax credit, also known as the investment tax credit (ITC), is a federal tax credit that allows homeowners and businesses to deduct a portion of their solar panel system's cost from their federal taxes. The credit was initially introduced in 2005 as part of the Energy Policy Act, and since then, it has helped many Americans switch to solar energy.

How the Solar Panel Tax Credit Works

The solar panel tax credit applies to the cost of purchasing and installing a solar panel system, including the panels themselves, mounting equipment, and wiring. 

According to an article published by Lauren Murphy and Lexie Pelchen on Forbes, "In 2021, the ITC provided a 26% tax credit for systems installed between 2020 through 2022. The ITC will now provide 30% for systems installed in tax years 2022 through 2032. So, when deciding whether to install solar panels, factor in a 26% to 30% discount" (source).

To claim the solar panel tax credit, you must own the solar panel system, and it must be installed on your primary or secondary residence. If you lease your solar panels, you are not eligible for the credit. Additionally, the solar panel system must be new, and the installation must be complete before the end of the tax year in which you are claiming the credit.

How the Solar Panel Tax Credit Can Save You Money

The solar panel tax credit is a dollar-for-dollar reduction in the amount of federal taxes you owe. For example, if the cost of your solar panel system is $20,000, and you qualify for the full 26% credit, you can deduct $5,200 from your federal tax liability. If your tax liability is less than $5,200, you can carry over the remaining credit to the following year.

The solar panel tax credit can be significant, especially for homeowners who pay a lot in federal taxes. The credit can help offset the upfront cost of installing solar panels, which can be expensive, and make solar energy more affordable in the long run. Additionally, solar panels can help you save money on your energy bills by generating your electricity and reducing your dependence on the grid.

For businesses, the solar panel tax credit can be even more beneficial. Businesses can claim the solar panel tax credit for both commercial and residential solar installations, and they can also claim the credit for solar projects that they don't directly own. This means that businesses can invest in solar energy without having to worry about the upfront costs of purchasing and installing solar panels.

The solar panel tax credit can also be combined with other incentives, such as state and local rebates, to further reduce the cost of installing solar panels. Some states, such as Massachusetts, offer incentives for solar energy, which can help make solar energy more accessible and affordable for homeowners and businesses.

How to Claim the Solar Panel Tax Credit

To claim the residential solar panel tax credit, you must file Form 5695 with your federal tax return ( 26 USC Section 25D(g) ). The form will calculate the amount of the credit you are eligible for based on the cost of your solar panel system and your federal tax liability. You must also include a copy of your solar panel system's installation contract to prove that the system is new and was installed before the end of the tax year.

And According to U.S. Department of Energy there are two tax credits available for businesses and other entities like nonprofits and local and tribal governments that purchase solar energy systems. (read more).

If you are not comfortable filing your taxes yourself, you can work with a tax professional or a solar installer that offers tax credit assistance. These professionals can help you navigate the complex tax rules and ensure that you receive the maximum credit for your solar panel system.