How Does Solar ITC Work?
A Comprehensive Guide
Green energy is the future, and governments worldwide are encouraging households to make the switch. The US government is no exception to this rule. The Federal Solar Tax Credit has been in place since 2005. The goal is to incentivize households to transition to solar, but time is running out on this credit.
The residential and commercial solar tax credit has seen tremendous success, with thousands of homes switching to greener energy. Here’s what you need to know about the federal investment tax credit (ITC).
What is Solar ITC?
The ITC solar tax credit is a type of credit you can claim via your Federal income tax. Rather than acting as a deduction, it reduces what you owe on your taxes for the year you decide to claim it.
The value of the Solar ITC has changed since its introduction in 2005. As of August 2022, you can claim 30% of the total installation costs of your solar system thanks to the Inflation Reduction Act (IRA).
This is great news for homeowners choosing to go solar in 2023 and beyond. Before the Inflation Reduction Act increased the tax credit, the ITC step-down was set to go from 26% in 2022 to 22% in 2023.
Unlike other tax credits, there is no cap on the amount you can claim back with the ITC solar tax credit. Installing your solar panels will enable you to claim back thousands of dollars on your installation costs, providing an instant return on your investment.
Now that we’ve answered, “What is the investment tax credit?” how do you qualify?
There are a few eligibility requirements. As long as you are a US resident or citizen and own your own home, you can claim back 30% of the installation costs of your solar system.
Just be aware that repurposing an existing system will not qualify you for the Solar ITC. The system must be entirely new.
How Does the Solar Investment Tax Credit Work?
As previously noted, taking up the ITC offer means you can claim 30% of the installation costs of a new solar system on your property. Claiming the deduction will be applied to your personal federal income taxes. Some states may also offer additional incentives you can apply to your state taxes.
Tax credits are a dollar-for-dollar reduction in your income taxes. The value of the credit differs depending on whether the system is installed on a residential or commercial building.
Just be aware that the solar ITC cannot provide you with a tax refund, only a reduction in your tax liability. For example, if your solar panel system costs $19,000, under the current rules, you would be able to claim a $5,700 tax deduction.
However, if your tax liability is less than $5,700, you can roll the remaining amount over to your following year’s taxes.
What’s Covered by the Solar ITC?
Your tax credit covers various expenses involved in installing your new solar-powered energy system. The following items are all covered when valuing how much you can claim through the ITC:
- Panels – Both solar photovoltaic panels and solar cells.
- Additional Equipment – The tax credit will also cover any other components required to run the system, such as mounts, wiring, balance-of-system equipment, and inverters.
- Batteries – The ITC will cover any storage devices, such as solar batteries. However, storage devices must be used exclusively by your solar panels. This rule changes to cover all energy storage devices, regardless of their exclusivity, starting from January 1, 2023.
- Labor – All labor costs related to the preparation and installation of solar panels. It also includes inspections and permitting costs.
- Sales Taxes – Any sales taxes paid are also covered under the ITC.
In short, everything related to getting your green energy system up and running will qualify under the terms of this tax credit. It is what makes it such a valuable incentive for a green future.
Make sure you have a fully itemized invoice if you claim this tax credit. Audits are rare, but you must provide a paper trail if you are randomly selected.
The Solar ITC Extension Explained
The tax credit was slated to step down from 26% to 22% starting from 2021 before the ITC extension. Any projects started in 2022 would have only qualified for a 10% tax credit, with residential projects being excluded entirely.
However, the solar tax credit extension passed in late 2020 provided a two-year extension on the ITC and a funding increase for energy research and development. Then, the Inflation Reduction Act of 2022 increased the Residential Clean Energy credit to 30%, extending through the end of 2032.
Now that the solar tax credit isn’t stepping down until 2033, you will still be able to claim the full value of the credit as long as you start construction before the end of 2032. How exciting is that?
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Making the switch to solar energy is a long-term investment in reducing your household energy bills and helping the planet. Lower your carbon footprint, improve your home’s curb appeal, and enjoy a significant return on your investment.
If you’re looking for professional solar panel installation in New Jersey, consider beginning your project soon. With the Inflation Reduction Act now law, it has never been a better time to install a solar system on your property.
To learn more about installing your solar system with EMT Solar & Roofing, get your free quote now.