With electricity and home energy costs rising across the country, the Inflation Reduction Act increases solar tax credits, making installing solar and batteries a more attractive investment for many owners than a few years ago.
With the new Residential Clean Energy Credit, you can deduct 30% of the cost of installing clean energy products for your home from your federal taxes. This credit is a reboot of the older, less valuable federal tax credit and will be available to taxpayers for the next decade.
Here’s what you need to know.
What is the new Solar Tax Credit?
If you install solar on your property anytime this year through the end of 2032, you’re eligible for a credit on your federal income tax of 30% of Eligible costs. There is no dollar limit for these expenses; You’re eligible for this 30% tax credit whether you spend $20,000 or more than $100,000 on costs related to your solar project.
How will the new Solar Tax Credit save you money?
The credit reduces federal taxes. So, if you spend $ 24,000 on a system, you can subtract 30 percent of that, or $7,200, from your federal taxes. (You must take credit for the year the installation was completed.) If, for example, you owe $7,000 in tax before the credit, a $7,200 credit would reduce what you owe to zero. However, it is not possible to get a tax refund on the remaining $200, but you can carry over that remainder to a future fiscal year.
You will also save on lower electricity bills. How much you will save depends on a number of factors, including how much electricity your home uses, the size of your solar system, how much sunlight it receives, and local electricity rates. Real estate experts say that a purchased solar system, as opposed to a rented one, can increase the value of your home when you sell it.
How long will the new Tax Credit last?
The 30% solar tax credit lasts until December 31, 2032. It drops to 26% in 2033, then to 22% in 2034, and disappears in 2035 unless Congress continues it. (The new law replaces an earlier law that was due to expire in 2024, which would have provided a 26% credit for solar installations this year and 22% in 2023.)
What about state and local tax incentives?
In addition to federal tax incentives for going solar, most states offer additional incentives. Be sure and check with your CPA to make sure you are able to take full advantage of the savings available in your state.
If you install a solar panel system on your home in Utah, the state government will give you credit towards next year’s income tax to reduce your solar costs. You can claim 25 percent of your total equipment and installation costs, up to $400. – not a bad deal for a system that can save you thousands each year on your energy costs! Starting in 2024, Utah will no longer off a state incentive for solar.
Idaho residents may qualify for a tax deduction of 40% of the cost of their solar in their first year and 20% for the following three years. The maximum deduction is $5,000 per year and not to exceed $20,000 in total.
What is important to understand about Idaho’s incentive is that it is a deduction of your taxable income, not a tax credit, as opposed to the Utah state incentives. So, you apply your tax rate to your deduced annual income. Meaning you subtract 40% of the project costs from your total income.
For example, if someone earns $110k and they buy a $25k solar system, they would take 40% of the total cost and subtract it from their taxable income. 40% of $25k is $10k. However, since the maximum deduction is 5k, that will be the amount deducted.
This is just an example, and every situation is different. Read up on these resources or contact your tax expert.
Do you qualify for the new Solar Tax Credits?
The new Solar Tax Credits are available to all taxpayers for their primary or secondary residence located in the United States and can be used by taxpayers at any income level. You can use it if you detail your taxes or take the standard deduction.
Note, however, that the solar tax credit is only available if you purchase a solar system; if you rent one, you cannot use the credit. The same is true if you are a member of a power purchasing co-op. However, if you are an interested tenant in a co-op, you can apply for credit for your purchase share. You can also apply for credit for your share of a community-owned solar system.
Can you use this credit if you also use other federal energy tax credits?
Yes. The new law also provides for a Non-Commercial Enhanced Energy Credit, which covers other qualified efficiency upgrades such as Energy Star certified exterior doors, airtight insulation, improved electrical circuit panels, and heat pumps. You can apply for both credits on your federal declaration in the same year or in different years, depending on when the installations were completed.
You can see if your home qualifies for solar by clicking this link.