In December 2020, Congress passed an extension of the solar investment tax credit (ITC), which provides a 30% tax credit towards residential solar system installations. It was previously set to expire in 2021, but with the recent extension, homeowners can now take advantage of the full 30% credit for systems installed until the end of 2022.
In 2023, the tax credit will drop to 22%, and in 2024, it’s set to expire again. There is still ongoing debate about extending the credit for another 10 years, but no official legislation has yet been made.
To understand your potential savings on a new solar installation, below we’ll take a look at:
- How the tax credit works
- Eligibility requirements
- How state tax credits can affect your federal tax credit
Want to claim your 30% solar ITC credit on a brand new custom solar installation?
Hurry before the deadline runs out! Call Photon Brothers at (720) 370‑3344 (Colorado) or (805) 351‑3371 (California) or schedule a FREE estimate online. Our friendly solar experts will help you understand exactly how much power you need, and what kind of solar system would provide your most significant ROI.
How the tax credit works
The solar investment tax credit (ITC) is not a direct payment. It’s a credit that you can apply on your federal income tax return.
For example, let’s say that you purchase a $15,000 solar system in 2021. If you purchase it outright, you’ll pay the full $15,000. Then, when you file your federal tax returns, you can claim the 30% tax credit of $3,900 towards your federal income tax liability. Depending on your income tax bracket, the amount you receive back will vary.
That being said, many homeowners choose to finance their solar systems through a solar financing partner. Photon Brothers offers an in-house financing team that will work with you to see which preferred lender is the best fit for your situation. To learn more about our financing options, visit our financing page.
Per energy.gov, you are eligible to claim the solar ITC if “your solar PV system was installed between January 1, 2006, and December 31, 2023.” This is great news if you installed a solar system in years past but never got around to claiming your tax credit.
Additionally, the tax credit can be applied to most common solar energy products— such as panels, inverters, mounting equipment, batteries, etc.— and there’s NO maximum amount. So regardless of how much your solar system costs, $10,000 or $100,000, you can rest easy knowing that the tax credit will help offset the price.
There are a few important stipulations, though, in order to claim your tax credit:
- The system must be new OR being used for the very first time. While you can technically purchase solar equipment second-hand, the tax credit is only applicable on the original installation. Meaning, if you’ve purchased used equipment and the previous owners claimed their tax credit, you cannot claim another tax credit for yourself.
- The system must generate electricity for a home located in the United States. If you purchase a solar system in the states but choose to install it out of the country, you are no longer eligible for the ITC.
- The system must be located at your primary or secondary residence, also in the United States. If you have three or more homes (or investment properties), you cannot claim the ITC for solar equipment installed in those residences.
- The system must be in use during the tax year. Meaning, if you purchase solar panels but haven’t yet installed them, you cannot claim the ITC until they’ve been installed.
How state tax credits can affect your federal tax credit
Per energy.gov, “state tax credits for installing solar PV generally do not reduce federal tax credits — and vice versa. However, when you receive a state tax credit, the taxable income you report on your federal taxes will be higher than it otherwise would have been because you now have less state income tax to deduct.”
To put it another way, when you combine state and federal tax credits, the total amount is slightly less than the combined sum.
For example, let’s say that your state offers a 25% solar tax credit. If you install a new solar system in 2021, you’ll also receive a 30% federal tax credit. With simple math, a homeowner might think they’d see a 51% total credit. However, the way that your taxes get calculated, the final credit will end up being less.
Why? Because of how your federal income tax bracket plays into the equation. This is also why we recommend consulting a tax professional to review your particular situation.
Let’s say you’re in the 22% federal income tax bracket. If you purchase a $15,000 solar system in 2021 and you’re eligible for both a 25% state tax credit and a 30% federal tax credit, the following formula will determine how much of a final credit you’ll receive:
0.30 + (1 – 0.22) * (0.25) = 49.5%
Instead of a 51% credit, you’ll receive a 49.5% credit on your new solar system. Which on a $15,000 system comes out to $7,425 savings, or a final purchase price of $7,575.
While the savings is less, it’s still pretty substantial, so we recommend you take advantage for as long as you still can!
Want a free quote on a custom solar installation?
Contact Photon Brothers today! Our team of licensed solar experts helps California and Colorado homeowners gain energy independence and lower their monthly power bills with custom solar installations. During your free in-home estimate, we’ll review your budget and financing options, as well as assist with local, state, and federal tax rebates and incentives!