Federal Solar Tax Credit for Homeowners: A Complete Guide

Are you a homeowner who’s been thinking about installing solar panels? If so, you’ll be interested in learning about the 2022 federal solar tax credit. This incentive offers homeowners a 30 percent tax credit for the cost of installing a solar energy system. Keep reading to learn more about the credit and how to qualify for it.

What’s the Difference Between a Credit and a Deduction? 

A tax credit is a provision that permits eligible taxpayers to subtract the credit they have accrued from the amount they owe in federal income taxes. For example, if you receive an $8,000 tax credit, you can subtract $8,000 from the amount you owe in federal taxes for 2022. 

A tax credit differs from a deduction or exemption in that it directly lowers the taxpayer’s bill rather than reducing one’s taxable income. 

How Much Is the Solar Tax Credit for 2022? 

Currently, the federal solar tax credit allows you to subtract 30 percent of the total cost of your solar system from the federal taxes you owe. This provision will be reduced to 26 percent in 2033 and 22 percent in 2034, and is set to expire in 2035 unless Congress extends it. Therefore, if you’d like to maximize your savings with the ITC, now is the best time to invest in a solar energy system. 

The tax credit rolls over yearly for up to five years. So, if you don’t have enough tax liability to claim the credit in full, you can deduct the remaining credit the following tax year.

The residential ITC is available to all US citizens; however, several guidelines must be met to qualify. According to the US Department of Energy, homeowners must meet the following conditions to qualify:

You must fully own the solar P.V. system. In the case of acquisition by lease, only the leasing company can lay claim to the tax credit. For instance, a Power Purchase Agreement (PPA) disqualifies one from being eligible for the tax credit. To qualify for the ITC, you’ll have to pay for the solar system with cash or a loan.

The solar system must be installed between January 1, 2006, and December 31, 2034. Solar systems installed before 2006 do not qualify for this tax credit, and those installed after 2034 may not qualify unless Congress renews this incentive.

Your solar PV system must either be new or be used for the first time to qualify for the ITC. Homeowners cannot claim the federal tax credit on used or repurposed systems.

The solar system must be located at your primary or secondary residence within the United States. For off-site community solar projects, you may qualify for the tax credit only if the power generated is credited against, and does not exceed, your home’s electricity usage.

Because the federal tax credit only applies to new solar system installations, purchasing a house with a preexisting solar system will disqualify you from claiming the incentive.

I am not a homeowner?

Yes, but you must be the owner of the system. For example, if you are a member of a condominium or a tenant-stockholder at a cooperative housing corporation, you may qualify for the tax credit if you contribute to the cost of the solar system and installation. In this instance, the amount you contribute to the cost of the solar system would be the amount you would use to determine your tax credit.

You can't claim the ITC if you rent the property and your landlord pays for a solar system. You must be the owner of the PV system to receive the solar tax credit

I installed a solar system on my vacation home in the USA?

Yes, as long as it is not a rental unit that you own. Rental units may qualify for the business ITC but not the residential solar tax credit, as detailed under IRC Section 48. This provision specifies that qualifying solar property costs must be "for use at a dwelling unit located in the United States and used as a residence by the taxpayer." If you use the home as a rental unit, contact a tax expert to see if you qualify for the business ITC.

I am not connected to the power grid?

Yes, you don't have to be connected to the grid, provided that the PV system is generating energy to power your home.

The solar panels aren't on my roof but are on my property?

Yes, the system does not have to be installed on your roof. It just has to be powering your home.

I have a home office, or my home is used for commercial purposes?

Yes, you can claim the credit in full if the amount spent on a PV system is primarily for residential purposes. If less than 80 percent of the cost is a residential expense, only the portion deemed residential spending can be claimed. The portion used for business may qualify for the business ITC.

I used a solar loan instead of paying upfront with cash?

Yes, systems financed through the seller are eligible for the solar tax credit if there is a contractual obligation to pay the debt in full. Interest owed on financing, origination fees, extended warranty costs, and other extraneous expenses aren't covered.

I bought the PV panels but haven't installed them?

No, the system must be "placed in service" during the year, meaning it has been installed and is generating power for your home.

I am part of an off-site community solar program?

Under some circumstances, yes, but it may be difficult to claim. The IRS states that off-site PV systems may qualify for the residential ITC under certain circumstances.

To qualify, you must be more than a "passive investor," meaning you'll need to participate in the ongoing solar project on a regular and substantial basis. The IRS states that tax credits acquired as a passive investor can only be applied to passive income tax liability, which pertains only to income earned via either rental activity or a business in which the taxpayer does not participate substantially. Therefore, most homeowners won't have passive income with which to claim a passive investment tax credit.

The federal solar tax credit covers a wide variety of expenses associated with the installation of a residential solar system. The following expenditures are typically included

• Solar PV panels or PV cells
• Contractor labor costs, including onsite preparation, assembly and installation, permitting and inspection fees, and developer fees
• Balance-of-system accessories, including mounting equipment, wiring, and inverters
• Energy storage devices such as solar batteries that have a capacity of 3kWh or more, or batteries that are less than 3kWh and are charged solely by the solar system
• Sales tax on eligible solar products
• Roof, water heater, air conditioner, and other associated expenses may be included under certain circumstances

On average, our customers in Central Florida are quoted as requiring a 17.4kW solar panel system. Nationally, the cost of a solar system averages approximately $2.94/W. Therefore, a 17.4kW system would cost $51,156 before any incentives are applied. After subtracting the 30 percent solar tax credit, this would be lowered to $35,809 for a savings of $15,347. 

The average cost for solar panels in Florida is approximately $2.53/W, so a 17.4kW PV system would be much lower than the national average, at $44,022. After applying the residential ITC, the price would be $30,815 for a savings of $13,207.

Solar energy can save you thousands of dollars in electricity bills each year. Still, for many homeowners, the initial sticker shock of buying a residential solar system may be a bit vexing. So, why are solar panels so expensive?

One of the primary reasons comes down to the cost of equipment. Making reliable and efficient PV panels requires advanced manufacturing techniques and costly raw materials such as lithium for solar batteries and high-grade silicon for solar panels.

Another factor is the soft costs associated with assembling a solar system. It takes skilled labor to install a rooftop solar system that is safe, compliant with local codes and manufacturer warranties, and can pass inspections from local building departments.

If you want to maximize your long-term savings on a PV system, it's essential to invest in reliable, high-quality solar products, make use of all the available solar incentives, choose the right financing method, and select an experienced and trustworthy solar contractor to design and install your PV system.

At Lake Mary Solar, our Florida solar contractor can walk you through every step. We'll design and install a solar system that's tailor-made for your energy needs, help you take advantage of all the solar incentives in your area, and recommend a financing option that suits your budget. We even offer a price-match guarantee for any licensed solar contractor in Florida.

If you’d like to find out how much a solar system will cost to power your home, try out our solar calculator.

If you're still on the fence about investing in a residential solar system, consider the long-term savings you'll reap from a rooftop PV system.

Based on our sales data, solar customers in Florida have an average monthly electric bill of $279. Therefore, if you were to invest in a system large enough to offset that electric bill, you'd save approximately $3,348 per year on electric bills.

Most modern solar panels are rated to last 25 years or longer and operate at 80 percent efficiency or higher at the end of that lifetime. That means that over the solar system's lifespan, you would save approximately $83,700 on monthly electric bills.

The payback period for a solar system is an important consideration when investing in PV panels. The term "payback period" refers to how long it will take to recoup the cost of the installation fee, solar panels, and any other solar accessories by saving money on your monthly utility bills.

To calculate the payback period for your solar system, you'll need to consider the total cost of the system, any rebates or incentives, and your average electricity usage.

For example:

Cost of Solar System
$44,022 (Total cost of system) – $13,207 (Federal solar tax credit) = $30,815 (Cost of system after incentive)

Annual Savings
$279 (Monthly electric bill savings) X 12 (Months) = $3,348 (Annual savings)

Payback Period
$30,815/$3,348 = 9.2 (Years to break even)

Based on these calculations, it will take 9.2 years to recoup the cost of the solar panel system. Considering the typical 25-year lifespan of solar panels, that means you'll have another 15.8 years of savings that will go straight into your pocket. And with the abundance of solar incentives available to Floridians, you can shorten this payback period considerably.

In addition to the federal solar tax credit, a wide range of solar incentives are available to Florida homeowners. These can be used to lower the price and shorten the payback period of your new residential PV system.

Net energy metering (NEM) is one of the best solar incentives available, allowing homeowners to dramatically lower or eliminate their electricity bills. By participating in a net metering program, you can sell excess power generated by your PV system back to your utility company. Florida offers full-retail net metering, which means you'll be credited for the energy produced by your solar system at the current retail rate for electricity.

Florida residents can also qualify for the Solar and CHP Sales Tax Exemption to reduce the cost of solar panel systems. This exemption omits solar products from the Sunshine State's six percent sales tax.

It's well known that installing a solar system can raise the value of your home. Fortunately, Florida offers a 100-percent property tax exemption for residential solar panel systems. That means you will be tax-exempt from any rise in property value due to the installation of PV panels.

In addition to these incentives, several other rebates and subsidies are available to Florida residents. Check out our in-depth guide on Florida solar incentives for more information.

As stated above, numerous state and local solar incentives are available to Florida residents. But these incentives could affect how much money you save with the federal solar tax credit.

Typically, any subsidies provided by your local utility company to install a residential solar system are not included in income taxes due to an exemption in federal law. This means that the utility rebate will be subtracted from the total cost of the solar system before the residential ITC is applied. As a result, the savings from the federal solar tax credit will be reduced.

Using this equation, you can estimate how much your tax credit will be after claiming a utility rebate:

30% x (Total cost of system - Utility rebate) = Federal tax credit value

If your utility company pays you money in exchange for solar renewable energy credits (SRECs), this payment will typically be considered taxable income. As a result, your gross income will be increased, but your federal solar tax credit will not be decreased.

It is important to note that Florida currently lacks an SREC market; however, Florida residents may be able to participate in SREC markets in other states.

In contrast to utility rebates, state rebates usually don’t affect your federal solar tax credit. The federal solar tax credit value can be calculated before applying any state rebates so that you won’t lose any value.

As with state rebates, tax credits from state governments do not usually affect the value of your federal tax credit. But if you do claim a state tax credit, it may increase your taxable income on your federal tax return because you have fewer state income taxes to deduct.

Currently, Florida does not offer a state tax credit for solar energy, but many other incentives are available to homeowners in the state. 

For more information about state incentives, visit the Database of State Incentives for Renewables & Efficiency (DSIRE).

You can claim the federal solar tax credit by filing your yearly federal tax return with the Internal Revenue Service (IRS). If you choose Lake Mary Solar to install your new solar system, our solar contractor will provide all the details on how to claim the solar tax credit.

1. Consult a tax expert and your solar contractor before claiming the tax credit
2. Download IRS Form 5695 and calculate the credit on Part I. On line 1, enter the total cost of the installation as stated in your contract
3. Fill in the calculations on lines 6a and 6b
4. Skip ahead to line 13 if the solar system is your only renewable energy addition and you do not have any rollover credit from the previous tax year
5. On line 14, determine any tax liability limitations by using the Residential Energy Efficient Property Credit Limit Worksheet provided by the IRS
6. Complete the calculations on lines 15 and 16 and enter the exact amount from line 15 on line 5 of your Schedule 3 (Form 1040)

Will I get a refund if the tax credit exceeds my liability?

The residential ITC is a non-refundable tax credit, so you won't receive a refund if the credit exceeds your tax liability. However, you may get a refund if the decrease in taxes owed results in an overpayment. Fortunately, the ITC rolls over into the following year, so you can deduct any remaining credit at that point.

Can I use the credit against the alternative minimum tax?

Yes, the federal solar tax credit can be applied to your federal income taxes or the alternative minimum tax.

Can I claim the credit if I bought a new house constructed in 2021 but didn't move in until 2022?

You can typically claim a tax credit on the expenses related to the system that already came installed on the house for the year in which you moved into the house.

Is there an income limit for the tax credit?

No, there is no income limit for the ITC, but you must have enough tax liability to claim the credit in full, or the remaining credit will roll over to the next tax year.

Can I claim the tax credit more than once?

In most instances, you can only claim the credit once; however, if you own more than one home with a solar installation, you may be eligible to claim the credit more than once. Consult with a tax expert to ensure that you qualify.

Can I claim the tax credit if I don't owe taxes?

No, the tax credit only offsets what taxes you owe and is not available as a tax refund. You can't claim the tax credit if you don't have any federal income tax liability.

Where can I find more information about the residential ITC?

To learn more about the federal solar tax credit, contact the Internal Revenue Service (IRS).

Address: 1111 Constitution Avenue, N.W., Washington, DC 20224
Phone: 800-829-1040
Website: www.irs.gov

So, there you have it: our complete guide to the federal solar tax credit for homeowners. By installing a residential solar panel system, you can save money on your electricity bills, help combat greenhouse gas emissions, and become more energy independent. And with the federal solar tax credit, you'll be able to make the switch to renewable solar power without breaking the bank. 

But you'll have to act quickly, as this incentive won't be around forever. If you're interested in making the switch to renewable solar energy, get a quote from us today. We'd love to help!