Federal solar tax credit in 2023: Complete guide

If you’re a homeowner who wants to go solar, now is a great time to take advantage of government incentives like the federal solar tax credit. The federal residential solar tax credit is the most valuable incentive you can claim this year because it saves you thousands of dollars in the form of a 30% tax credit, and there’s no limit to the amount you can claim.

In this article, we’ll walk you through what you need to know about how to qualify for the federal solar tax credit and how to benefit from of all of the state and local incentives available where you live.

Disclaimer: This article is intended to provide an informational overview of the federal solar tax credit for interested homeowners. It is not intended to serve as official financial guidance. Readers interested in installing solar products should use their best judgment and seek advice from a licensed tax professional.

The federal solar tax credit, commonly referred to as the investment tax credit or ITC, allows you to claim 30% of the cost of your solar energy system as a credit to your federal tax bill. If it costs $10,000 to install your solar panel system, you’ll receive a $3,000 credit, which directly reduces your tax bill. On average, a typical  EnergySage Marketplace shopper saves an extra $6,150 on their solar costs when they claim the ITC. The tax credit will remain at 30% until 2033, when it’s scheduled to drop down to 26%.

The ITC was set to expire in 2022, but was extended until 2033 as part of the Inflation Reduction Act. The solar investment tax credit is now available to homeowners in some form through 2034. What year you install your system determines how much of your solar costs you can claim as a credit:  

• 2016 – 2019: Eligible for a 30% credit.

• 2020 – 2021: Eligible for a 26% credit.

• 2022 – 2032:  Eligible for a 30% credit.

• 2033: Eligible for a 26% credit.

• 2034: Eligible for a 22% credit.

• 2035: The ITC is set to expire and you will no longer be able to claim the federal solar tax credit.

You’re eligible for the solar investment tax credit if you own your solar energy system. Even if you don't have a large enough tax bill to claim the entire credit in one year, you can roll over the remaining credit amount. However, if you sign a lease or power purchase agreement, or PPA, with a solar installer, you are not the system's owner and cannot claim the tax credit. It's also important to note that there is no income limit on the ITC program, so taxpayers in all income brackets are eligible.

If you're not sure if your solar investment qualifies for the ITC, here is a checklist of some of criteria to keep in mind:

• Your solar photovoltaic (PV) system was installed between January 1, 2006, and December 31, 2034.

• Your solar PV system was installed on your primary or secondary residence in the U.S.

• Your solar PV system is new or being used for the first time – the credit can only be claimed on the original installation of the solar equipment. For example, if you buy a house with a previously installed solar panel system, you would not be eligible for the credit.

Homeowners who leverage the 30% ITC from the federal government can plan to see the following expenditures covered, among other expenses:

• Cost of solar panels

• Labor costs for installation, including permitting fees, inspection costs, and developer fees

• Any additional solar equipment, like inverters, wiring, and mounting hardware

• Energy storage systems rated three kilowatt-hours (kWh) or greater (starting in 2023).

• Sales taxes on eligible expenses

There are aspects of your solar installation that you can’t claim as part of your federal tax credit. For example, if you need to repair or replace your roof or cut down trees to install solar panels, you can’t include those expenses in the value of your claim.

Aside from the ITC, there are several worthwhile other solar incentives to consider like rebates and state-sponsored programs depending on where you live.

Here are some of the financial incentives you can benefit from in addition to the federal solar residential tax credit:

• Rebates from your utility company

• Rebates from the state

• State tax credit

• Payments from renewable energy certificates (SRECs)

• Other federal energy efficiency home improvement credits

Federal policies and incentives that support solar investments have increased significantly in recent years, and solar deployment has grown nationwide on both a distributed and utility-scale level. The federal tax credit has allowed more businesses, homeowners, and taxpayers to invest in solar, driving down solar costs while increasing long-term energy stability. The ITC has proved enormously successful: according to the Solar Energy Industries Association (SEIA), it has helped the U.S. solar industry expand by more than 200% over the past two decades.

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