How The Inflation Reduction Act Affects the Solar Tax Credit

More households across America are focusing on being environmentally conscious by changing their daily lives. In 2020, for example, solar panel use increased 43% from the previous year.¹ 

There’s no better time to implement clean energy sources into your home than right now, especially in light of the recent Inflation Reduction Act.

Solar panels provide emissions-free energy and help reduce your carbon footprint. If you’re weighing the costs and considerations of installing solar panels on your property, it’s good to know what incentives are available to you in the coming years. Here’s a recap of the Inflation Reduction Act and how the updated tax credit works.

What Is The Inflation Reduction Act?

In response to high inflation and its impact on the global economy, the federal government passed the Inflation Reduction Act on August 16, 2022. 

While “inflation” is the primary focus, this legislation touches on many areas of financial concern, including corporate taxes, Medicare, the Affordable Care Act marketplace, electric vehicle incentives, and more. 

For the purpose of this article, we’re focusing on one of the act’s biggest climate-focused changes: the expansion of the “Federal Tax Credit for Solar Photovoltaics,” also known as the Investment Tax Credit (ITC).

Changes to the Solar Investment Tax Credit

Taxpayers use the ITC to get back a percentage of the amount spent on a solar photovoltaic (PV) system. Following recent legislative changes, here’s how the ITC works:²   

If you install an eligible PV system between now and 2032, you’ll receive a 30% tax credit. If you installed a PV system in 2022 but did not yet claim your tax credit, you can still receive the complete 30% back. This is an 8% bump from the previous 22% ITC.

Starting in 2033, the tax credit will decrease to 26% and drop to 22% by 2034.

To emphasize the significance of this tax credit, the anticipated savings is more than $7,500 per installation. And don’t forget about the ongoing savings of around $9,000 on electric bills over the lifetime of the PV system.² 

What Is the Residential Clean Energy Credit?

The previous Residential Energy Efficient Property Credit is also rebranding under the Inflation Reduction Act. Now called the Residential Clean Energy Credit, households installing eligible systems using clean energy can claim 30% back on their federal tax returns. Similar to the ITC, this credit drops to 26% in 2033 and then 22% in 2034.³   

The scope of this credit also increased to include battery storage for solar systems with a capacity rating of 3 kilowatt hours or greater.² 

Eligibility Requirements for the Federal Solar Tax Credit

Not everyone or every system is eligible for the federal solar tax credit. Here are the criteria you must meet to take advantage of the ITC:⁴  

• You must have installed your PV system between January 1, 2017, and December 31, 2034.
• The system must be at a residence you own within the United States.
• You purchased an interest in an off-site community solar project.
• You own the system outright, meaning you are not leasing it or paying a company to purchase electricity generated by the system.
• It’s an original installation; the system is new you’re using it for the first time.

What Expenses Come With Installing a Solar System?

Even with a 30% tax credit, there’s no getting around it—solar energy systems are expensive. 

While considering whether implementing a solar system is feasible for your home, here are the common costs associated with installation:⁵  

• Solar PV panels or PV cells
• Labor costs for onsite preparation, installation, and assembly
• Cost and fees of permits, inspections, and development
• Energy storage devices
• Mounting equipment and wiring
• Sales tax

You can include all costs listed above in the total amount claimed on your tax return.

Will Other Incentives I Receive Affect the Federal Tax Credit?

The Database of State Incentives for Renewables and Efficiency allows residents to filter by state and view current tax credits and incentives. In general, taking advantage of a state tax credit for installing a solar PV system will not impact your ability to claim the federal tax credits.

Keep in mind that using a state tax incentive could mean reporting less taxable income on your state returns than your federal tax returns.

Where Do I Claim the Credit?

You can claim the ITC on your federal tax return using IRS Form 5695. If you’re filing your taxes yourself, here are the instructions for filling out Form 5696.

If you’re working with a CPA or tax advisor, let them know you’re eligible for the ITC and provide any necessary receipts or documentation.

Should I Invest in Solar Panels? 

The recent tax credit changes probably have you wondering if it’s the right time to install a solar PV system. Here are a few pros and cons to keep in mind as you decide.

Pros of Investing in Solar Panels

Installing a solar system gives you the independence to “live off the grid.” You no longer rely on the energy grid, which means immense electric bill savings. Not to mention, some cities and towns actually pay you for your solar energy.

Solar is a cleaner energy source than gas or oil. That’s why the federal government incentivizes homeowners to install solar systems to combat the climate crisis.

Installing a solar system also increases the value of your home. In fact, a recent study by the U.S. Department of Energy found that homebuyers are willing to pay around $15,000 more for a home with a solar PV system already installed.⁶ These systems are considered attractive upgrades that help homes sell faster and at a higher price.

Cons of Investing in Solar Panels

Solar panels pack a big punch with their upfront costs, usually between $15,000 to $25,000. While financing options exist, that’s still an enormous undertaking for most households. As we mentioned, renting or leasing panels won’t get you any tax incentives, but they may be a more affordable option.

Cost considerations aside, not all homes are suitable for solar panels. If trees or other buildings heavily shade your property, you may not get enough sun to justify the cost of installation. Some neighborhoods have strict regulations as well. Check-in with your HOA to confirm that solar panels are allowed on your property. 

Still Have Questions About the Solar Tax Credit? 

The Office of Energy Efficiency and Renewable Energy offers a comprehensive Homeowner’s Guide to Going Solar. We highly recommend giving it a read if you’re considering installing a PV system.

Navigating tax credits can be confusing, especially as new legislation passes and terms change. Because solar PV systems are a major purchase for any homeowner, we recommend discussing the decision with your financial advisor. They’ll help you decide if this is the right time to buy and how it’ll impact your other financial goals.

As always, feel free to reach out to our team. We’re happy to address your questions regarding the ITC and other changes in the Inflation Reduction Act.

Sources:

1Solar panel pros and cons: Find out if they’re worth it for you

2Solar Investment Tax Credit: What Changed?

3H.R.5376 – Inflation Reduction Act of 2022

4Internal Revenue Service publication 201536017

5Homeowner’s Guide to the Federal Tax Credit for Solar Photovoltaics

6Team of Appraisers Across Six States Find Home Buyers Will Pay Premium for Solar Homes