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The Federal Solar Tax Credit (ITC)

Southern Californians looking to install solar panels at their homes will need to understand how the federal solar tax credits work to maximize their savings. Knowing how the federal solar tax breaks work can help homeowners get the best deal possible when purchasing solar panels and help cover some of the installation costs.

- UPDATE! -

The Federal Solar Tax Credit increased to 30%!

Big news! You can save even more by going solar now. As part of the Inflation Reduction Act, signed into effect by President Joe Biden on August 16th, 2022, residential solar users can take advantage of the original 30% Solar Investment Tax Credit through 2032! 

The Investment Tax Credit, sometimes knows as the "solar tax credit" or "ITC"  is an incentive program offered by the U.S. government through the Internal Revenue Service (IRS) to encourage Americans to install energy-efficient solar panels on their homes. Currently, there are crucial deadlines in place for the credit to not only reduce but eventually expire completely. So it's important that you act now to ensure that you don't miss out on a great opportunity to save on your solar installation! 

What is the Federal Solar Tax Credit (ITC)?

Since 2005, homeowners have been encouraged by the federal government to "go solar" on their homes through the solar investment tax credit (ITC) which is sometimes knows as the "federal solar tax credit." California homeowners looking to install a new solar panel system for their homes or property in 2022 are eligible to receive a tax credit equal to 26 percent of the cost of your solar home energy installation project on your existing tax bill. This can lead to big savings. For an average system, this can add up to almost $8,000 or even more for larger systems.

Origingally set at 30%, the tax credit decreased in 2019  to 26%, but is currently legislated to stay at 26% for solar projects that are completed and operational between 2021-2022. Next year, the federal solar tax credit will reduce further to 22%, which is still a great incentive for those wanting to switch to solar, but not as enticing as the current credit. The tax credit program is scheduled to expire January 1, 2024.

Determining Eligibility for the Federal Solar Tax Credit

Make sure that you are eligible and can take full advantage of the federal solar tax credit by reviewing the following key requirements:

  • Your solar system was installed within the year that you are claiming the federal solar tax credit. 

  • Make sure that you have sufficient tax liability with the IRS to offset costs (see our FAQs section below).

  • You are the owner of your solar system. Financed systems are also considered eligible.

  • If your solar installations requires a new roof, some, but not all of these costs are covered by the ITC. Contact a tax professional to determine your eligibility.

  • Solar Battery storage systems are also covered by the tax credit as long as teh energy that is being stored is generated from a solar panel system.

How To Claim Your Solar Tax Credit

Steps to Claiming the ITC

Claiming the Federal Solar Investment Tax Credit (ITC) is relatively straight-forward. By downloading form 5695 and making some basic calculations you'll be on your way to saving on the overall cost of your solar system.

 

Sunny Solar Power recommends that taxpayers consult a professional tax expert during this process to ensure that you are correctly claiming the ITC.

Download form 5695 from the IRS.

Calculate the credit on Part 1 of the form being sure to file your system as "qualified solar electric property costs." On line 1, use the final value of your solar contract to list your projects' total cost. 

Calculate lines 6a and 6b.

Calculate any tax liability limitations on line 14 by using the IRS's worksheet

Calculate lines 15 and 16, being sure to enter the exact number from line 15 on your Schedule 3 (form 1040) line 5.

Frequently Asked Questions about the Federal Solar Tax Credit

Here we cover some of the most commonly asked questions regarding the solar investment tax credit (ITC).

  • How does solar power work?
    Solar power works when sunlight hits the surface of a photovoltaic cell, which converts light into electricity. The energy from the sun then travels through wires to a battery where it is stored for later use.
  • What Is solar energy?
    Solar energy is the use of sunlight for generating electricity. The sun provides free energy all year round, which we just need to capture it. There are two main types of solar power generation systems: photovoltaic panels and concentrated solar power plants. Photovoltaic panels convert light directly into electricity using semiconductors, while concentrated solar power plants use mirrors to concentrate sunlight onto boilers that produce steam to drive turbines.
  • How efficient are solar panels?
    Solar panels are extremely efficient at converting sunlight into electricity. The efficiency of solar panels depends on several factors such as the size of the panel, how much light hits the panel, and whether the sun is shining directly overhead. If you live in a sunny area, then solar energy may be a great option for powering your home. However, if you live in a cloudy region, then solar power might not be worth the investment.
  • How does solar photovoltaics work?
    Photovoltaic cells use the raw material silicon to turn light energy directly into electrical current. Electricity produced by photovoltaic systems is direct current (DC), which is then converted to alternating current (AC) by an inverter before being distributed to homes and businesses.
  • What happens to my solar power system if I move?
    The solar system will remain with your house once sold and the new owners can work with Sunny Solar Power to continue to monitoring the system's energy production and provide them with the necessary reporrts and answer any questions they may have. Your real estate agent should be sure to include the added value your solar panel system adds to your home when listing it. Additionally, a solar appraisal can give you an accurate estimate of your solar power system's worth.
  • Is "going solar" right for everyone?
    Unfortunately, not everyone's roof is setup to properly utilize a solar system as there could be problems with roof space, tree shading or orientation to sunlight. Additionally, some folks live in areas where the energy rates wouldn't make sense to go solar, or they don't own their own home. It's likely though, if you own your own home and your energy rates are currently high you could benefit from a solar system and owning your own energy.
  • Will I receive a rapid turnaround for my installation?
    We have a team of specialists that can help you with your solar energy needs. We are fast and efficient so we don't compromise quality for speed. Our main goal is to provide our customers with the best products available on the market, all while taking into account their specific requirements and wishes.
  • What is "net metering"?
    Net metered systems allow solar customers to export excess electricity back to the grid at full retail rates. These credits are then credited to your account each month. If you produce less than what you consume, you'll owe money to your utility company. However, if you produce more than you need, you get paid for the extra production. You can also sell any surplus electricity you generate to other utilities or even to the local electric coop.Net metering establishes an annual, not monthly, billing cycle for energy charges and allows solar customers to receive retail value credit for all energy exported to the grid within their 12 month billing cycle. Some solar customers that are grandfathered into their net metering agreement that is available the day they receive permission to operate for 20 years. After those 20 years, they will be defaulted on to the new net metering arrangement that is available during that time. California is one of the few states in the United States with a net metering program, not all states have this critical program that makes solar affordable and accessible.
  • Do I need to maintain my solar panels?
    The average solar panel system requires very little maintenance once they are installed and the only recommended maintenance is to spray water on the panels using a garden hose 3 to 4 times a year. Since the panels have tempered glass, it is important to only apply water in the morning or evening when the surface temperature is not hot. If you live in an area that has a lot of smog, dust, or dirt more frequent cleanings may be suggested.
  • How are solar panels installed?
    We can install your solar panels on the roof of your home or on the ground on your property (preferably facing a direction with the best southern exposure). The basic installation procedure includes installing metal rails on your roof, attaching the solar panels to the metal rails and connecting the panels to the solar inverter.
  • How many solar panels do I need?
    We will work with you to find the right balance between generating enough power and keeping your electricity costs as low as possible. Your Sunny Solar Power expert will conduct an energy audit to determine how much energy your current system is producing and how much you actually need.
  • Do solar panels degrade over time?
    While it is true that solar do have what is called a degradation rate, they are well known for being extremely long-lasting and durable. Solar is considered a fantastic long-term investment that offers savings and peace of mind. A Panasonic 330 panel, for example is warrantied to degrade only by .26% per year, meaning that at the end of a 25-year period the panels will still produce over 90% of what they did on the first day of installation.
  • If a solar panel is cracked, will it still work?
    When a panel is severely damaged, it won't be able to generate any electricity. However, if the damage is minor, then it may still be able to produce enough energy to meet your needs. Solar panels are generally designed to last between 20 and 25 years before they start to lose efficiency. Once this happens, it's best to replace them.
  • What are Microcracks in solar panels?
    Micro-fracture, also called micro-crack, represents a form of solar cell decay. Silicon used in solar cells is extremely thin, and expands and shrinks as a result of thermal cycles. Solar panels expand during sunlight hours because of warmer temperatures. Problems such as microcracks are typically a result of issues that arise during the production process, shipping, or during the process of installation.
  • How often will my solar panels require cleaning?
    Solar panel maintenance should be performed regularly to ensure maximum performance. Cleaning your solar panels can help increase the life span of the panels and also reduce the amount of energy needed to power them. The general recommendation is every six to twelve months.
  • Do damaged solar panels present a fire hazard?
    Photovoltaic solar panels are typicall not a fire hazard however poorly-installed panels or defective connections such as sensors or the junction box can result in rare incidence of solar panel fires. So a home with properly installed solar panels will not catch fire.
  • What are the solar financing options that are available?
    Cash is always the prefered method of paying for your solar system. However, solar leases are an alternative to purchasing a solar panel system outright. Solar leases, which can be obtained through various creditors, allow homeowners to get a solar panel system installed while avoiding the costs associated with ownership. A typical solar lease agreement lasts anywhere from 10 years to 30 years and includes a fixed monthly fee. At the end of the term, the homeowner must either purchase the panels or return them to the installer. If the homeowner chooses to keep the panels, he/she receives a cash rebate equal to the amount paid during the lease period. This means that the homeowner does not need to worry about paying any additional money after the lease ends. However, if the homeowner decides to sell his/her house before the lease expires, there may be issues with returning the panels because the owner may not be able to sell the property until the panels are removed.
  • Are solar panels worth it?
    Absolutely! We’ve seen firsthand how solar energy changed some of our customers’ lives. But don’t just take it from us. Check out our reviews to hear more from homeowners just like you who decided to go solar. Solar energy is a great way to reduce your electric bills while helping the planet and generating, clean renewable energy.
  • What tax incentives or rebates are available for Californians?
    There is a federal tax credit available to everyone who goes solar. As of 2022, it covers 26% of your entire project cost and you credit it to your taxes owed for the following year. However, this credit is reducing to 22% for 2023 and will go away completely after that.
  • When am I eligible for the federal solar tax credit (ITC)?
    If you had your system installed prior to the end of 2023, you live in the home where it is installed, and you fully own or finance your solar system, you will be eligible for the ITC.
  • What should I do if the credit is higher than my tax liability?
    If your credit is higher than your tax liability, you have the option to roll over some of the credit that you would receive to a following year’s taxes.
  • What is the income limit for the ITC?
    Fortunately, there is no income limit for the federal solar investment tax credit (ITC), making it accessible to taxpayers of all income levels. To be eligible, you must own your solar energy system. It's important to have a tax liability because the credit is used to offset taxes you owe. If you don't owe taxes this year, any unused credit will roll over to the next year.
  • If I wait a few years can I still get a federal solar tax credit?
    The Federal Solar ITC begain in 2018 and will expire at the end of 2023. If you haven’t already started planning for your next solar installation, now is the time! You can still qualify for the full 26% Federal Solar ITC through 2022, but after that, this credit reduces before ultimiately expiring in 2023, so you’ll need to plan ahead to ensure you get the maximum amount possible before the expiration date. UPDATE: As part of the Inflation Reduction Act, signed into effect by President Joe Biden on August 16th, 2022, residential solar users can take advantage of the original 30% Solar Investment Tax Credit through 2032!
  • What else does the federal solar tax credit cover?
    According to the EERE, the federal solar tax credit covers the following: Panels, Batteries, Labor, Sales Tax and Additional Equipment such as the mounting equipement, inverters, and balance-of-system equipment and wiring.
  • Is it possible to claim the federal tax credit twice?
    Although technically, it is not possible to claim the solar tax credit more than once if you own a home, the unused amount of the credit will continue to roll over year to year for up to five years. For Californians that own more than one home with a solar system intalled, they maybe eligible, but we recommend you consult a tax expert first to determine your eligibility.
  • What if I don't owe any taxes? Can I still take advantage of the federal solar tax credit?
    Unfortunately, no, you cannot claim the ITC if you owe no taxes as there is no costs to offset as part of your balance to the IRS.
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