The Inflation Reduction Act of 2022 proposed that the Investment Tax Credit (ITC) for residential solar installations be extended to 2032 at a 30% rate. This is great news for homeowners thinking about going solar in their households as a way to save on rising energy costs.
ITC has been one of the most popular schemes that have led to massive growth in renewable energy reliance, especially in solar. The tax credit allows homeowners to claim tax relief related to the total solar installation cost for the year they installed it.
Introduced in 2005 as a part of the Energy Policy Act, ITC was set to expire in 2007 but the Congress subsequently extended the expiration date many times. The extension provided as a part of the Inflation Reduction Act of 2022 is the latest in line.
This blog will look at the solar investment tax credit in detail and how it would help homeowners looking to install solar energy systems in their homes. Read on.
How Does the Solar Investment Tax Credit Work?
Simply put, it gives homeowners a chance to recoup some of the investment that they made into installing solar panels and energy systems back as a tax credit. Initially, when it was introduced, the tax credit was capped at 30% of the total installation cost of solar. This was set to reduce to 26% in 2022 and 22% in 2023. Starting from 2024, the tax credit was proposed to be eliminated entirely. The new bill has now extended the period to 2032 at the current 30% rate, and then it will reduce to 26% in 2033 and 22% in 2034.
This is a tax credit and not a tax refund. This is how it essentially works. Say you spent $10,000 on installing solar panels and other systems in your home. As per the ITC, you are eligible for a tax credit of $3000. If you owe $4000 as taxes for the year, you can offset it by the tax credit and your total tax due would be just $1000.
However, if you owe just $2000 as taxes, you cannot get a refund of $1000 after the tax credit. Your total tax due will reduce to zero. However, the ITC can be rolled over to the next year. This means that you can use $1000 worth of credits the next year when you are paying federal taxes.
The 30% tax credit is applicable for energy storage systems as well. So if you are planning to get some battery storage systems installed in your home or your community as a whole, you are eligible for tax credits for the amount you have spent installing it
ITC for solar has been a major driver in the growth of the solar industry in the US and renewable energy adoption in general. The tax credit allows the residential owners investing in renewable energy to recuperate some of that amount. This can be added to the savings on top of the energy savings you will realize by using solar energy as opposed to using electricity from the grid.
Why is the Extension Important?
This proposed extension is coming at an important time. Consumers are concerned about the rising energy costs as well as the general cost of living across the country. There are also major concerns over climate change and the dependence on fossil fuels for energy. The extension addresses both these issues in some ways.
While solar offers major advantages for consumers both in terms of cost savings and saving emissions, the initial cost of installation is perhaps the biggest deterrent. Despite the advancement in solar technology, the cost remains quite high. The tax credit offsets this by quite a bit. According to the proposed bill, there are “adders” as well which further enhances the tax credit. Adders depend on the type of organization, domestic use, and other factors. Together with these adders, the total tax credit could be higher than the 30% proposed.
The extension also comes at a time when the previous tax credit period was set to expire. The 2020 COVID relief bill extended the expiration period by 2 years. According to this extension, the tax credit was at 26% in 2022 and reduced to 22% in 2023 and expiring in 2024. The extension continues the 30% rate till 2032 at least.
California is undoubtedly the leader when it comes to solar power adoption. Several policies have enabled a largescale switch to solar. Residential solar installation has also been on the rise for several years thanks to policies like NEM and NEM 2.0. However, the proposed NEM 3.0 cuts back on the many benefits that the previous versions of the program offered to people who send energy to the grid that is generated from residential solar installations. The tax credit will be a good incentive to cushion some of the blow that NEM 3.0 lands on rooftop solar installations.
The extension is likely to keep the momentum going on residential solar adoption across the country. It will also generate a lot more jobs in the solar industry as there is rising demand for solar power. The businesses working in solar energy will also be looking at the extension in a positive light.
How Do You Qualify for the Tax Credit?
The ITC has a broad application. Almost all solar installations are eligible for the tax credit. There is no cap on the amount that can be claimed so you can claim the entire 30% of the installation cost no matter how big or small your overall installation is. The only catch is that you will not get a refund amount for the excess credit. However, the rollover feature is quite handy in such cases allowing you to save taxes in the subsequent year as well.
Another question that comes up is when there are multiple properties involved. The solar tax credit can be claimed if you have undertaken solar installation in multiple homes. However, the catch is that you should have lived in these homes for a part of the year. So if you have a home that has been rented out to a tenant and you have installed solar here, you cannot claim tax credits for this.
It’s also common to find cases where you have leased solar equipment from a provider. In these cases, usually, it’s the provider that owns the equipment during the period of the lease and they are eligible for tax credits. However, these providers will work with you for a deal where you get these tax credits passed onto you in the form of reduced monthly payments.
The solar tax credit also not just covers the basic cost of equipment. It covers a range of costs such as labor and installation costs, sales taxes, costs of wires and other equipment needed, and more.
How to Claim the Tax Credit
Claiming the tax credit is a pretty straightforward process. Here are the steps.
- Determine the total amount of investment you made for the solar installation. You can claim tax credits for 30% of this value.
- Fill up the IRS form 5695 stating that you’re eligible for investment tax credits for solar installation
- Once this is done, you can enter the credit into your 1040 when you are filing your tax returns to reduce your overall tax liability by the credit amount. If the credit amount exceeds the total tax you have to pay, the rest of the credits can be forwarded to the next year.
The recent extension of the federal Investment solar tax credits scheme is a boon for homeowners planning to install solar panels and systems in their homes in the coming years. The investment tax credit incentivizes the homeowners for switching to solar power and also offsets some of the high initial costs which can be burdensome.
The extension is also a great win for the solar energy industry that has taken significant leaps forward both in terms of technology and adoption. This will likely keep the demand for solar growing and with more favorable policies in place, the industry is set for more growth in the coming years.
Thinking about solar? Enlightened Solar are experts in solar installations in California with hundreds of successful installations. Get in touch to understand what suits you best, and how you can get maximum savings from solar installation in your home.