Understanding the 2023 Federal Tax Rebates for Solar
With the passing of the Inflation Reduction Act, Congress extended the Federal Solar Investment Tax Credit until the end of 2034. Under the old legislation, the tax credit was going to fall to 22% in 2023, but now that amount has been increased to 30% under the new law. In fact, under the new law, solar customers who have their residential solar panels installed and placed online by the end of 2032 will be eligible for the 30% tax credit.
Residential customers who wait until 2033 will see their tax credit drop to 26%, followed by another drop 22% in 2034, after which the credit is set to expire.
In this post, you’ll learn everything you need to know about the Federal Tax Rebates for Solar Power for 2023.
Two New Features of the Updated Federal Solar Investment Tax Credit
In addition to extending the coverage dates and increasing the amount of the tax credit, the Inflation Reduction Act also included two new provisions that residential solar customers will find beneficial. These two new features include:
- Battery storage is now included: The Inflation Reduction Act changed how the tax credit can be applied to battery storage, something that wasn’t included previously. The new law allows homeowners to apply the 30% credit to battery storage, including energy storage systems that were installed after the home’s solar array (as long as they’re charged exclusively by your solar panels).
- The updated solar tax credit can be claimed retroactively: Homeowners who had their solar systems installed in 2022, prior to the passing of the Inflation Reduction Act, are now able to retroactively claim the 30% credit instead of the 26% that was previously allotted for 2022 installations.
How the Federal Solar Tax Credit Works
If you had a solar system installed in 2022, then here’s how the 30% tax credit will work on your 2022 taxes. We will use a $20,000 home solar energy system as the example.
If you installed a solar energy system on your home in 2022 at a cost of $20,000, then you would be able to claim a $6,000 tax credit when filing your taxes in 2023. It is important to note that this does not mean that you will receive a tax refund check for $6,000. Instead, the tax credit is applied to reduce the amount of tax owed in the year of installation (and subsequent years if the full amount isn’t used at once).
So, if you would normally owe $10,000 in total tax for 2022, then the $6,000 solar investment tax credit you receive will reduce the amount you owe to $4,000. However, if your tax liability doesn’t meet or exceed the amount of your solar installation cost, then you will miss out on its full value.
The good thing is that the credit (or any unused amount) can be rolled over to a subsequent year. By permitting this flexibility, the new law will allow some homeowners to take better advantage of the credit because they can plan their tax installments and overall liability.
How to Claim the Solar Tax Credit
Claiming the Federal Solar Investment Tax Credit is relatively easy and it takes about 45 minutes to complete. Here is a step-by-step tutorial:
- Claim the federal solar tax credit on your annual federal tax return
- Download IRS Form 5695 to complete and submit as part of your tax return
- Calculate the credit using Part 1 of IRS Form 5695
- Write in the total cost of your solar installation on line 1
- Complete the calculations on lines 6a and 6b
- Calculate any tax liability limitations using the IRS’s Residential Energy Efficient Property Credit Limit Worksheet
- Write in the answer on your worksheet on line 14
- Complete the calculations on lines 15 and 16 and then enter the figure from line 15 on line 5 of your Schedule 3 of IRS Form 1040
Solar Tax Credit Qualifications
If you want to add solar panels to your home and qualify for the 2023 solar tax credit, then there the Office of Energy Efficiency & Renewable Energy (EERE) lists certain requirements that you will need to meet. These include:
- You must own or be financing your solar energy system. Solar leases and power purchase agreements (PPAs) do not qualify for the tax credit.
- For the 30% credit, the installation date must between January 1st, 2022, and December 31st, 2032.
- The equipment installed must be original equipment, not repurposed or reused parts of an existing system.
- The system must be installed on your primary residence or secondary home in the United States (or at an off-site community project if the electricity generated is credited against your home electricity consumption, but does not exceed it).
While you have until the end of 2032 to qualify for the 30% tax credit before it starts to step down, waiting until then to have your system installed will most likely result in you regretting not getting your system installed sooner. After all, the sooner you have solar panels installed, the sooner you can start enjoying lower energy bills, access to clean and reliable electricity, energy independence, and so much more. In fact, with the average solar power system paying for itself within seven to nine years, you could even have your system fully paid off before the end of 2032!