Solar Panels and Tax Benefits: a Homeowner's Guide
Alternative energy might not be as "alternative" as it seems, as 2.7 million American homes relied on residential solar photovoltaics (PVs) as of 2020. With that said, this number only accounts for about 3.2% of American single-family residences –– and the majority of Americans have not yet taken advantage of the benefits of a solar energy system. But those who have not yet switched to solar energy are probably considering doing so, given the recent introduction of the Federal Solar Tax Credit. Keep reading to discover the benefits of installing solar at your residence and how to claim the Federal Solar Tax Credit.
Benefits of Switching to a Solar Panel System
Before we dive into the tax credit benefits of switching to solar energy for your home, let's look at some of the other advantages of installing a solar PV system. For starters: Solar dramatically reduces your home's electricity consumption costs. Considering you are producing your energy instead of purchasing electricity generated by the utility company, your electric bill may reduce. You may even earn money by "selling" energy back to the utility company, as they will sometimes purchase electricity generated by your solar PV panels.
Renewable energy sources like solar can be a great option for those searching for a replacement for fossil fuels, coal, and oil. Solar panels are also a greener, reliable alternative to traditional energy sources. Whereas oil and coal produce pollutants that are harmful to the environment, solar simply harnesses energy from the sun and turns it into usable energy.
A Look at the Federal Tax Credit for Solar Photovoltaic Systems
In addition to the benefits of switching to renewable energy, solar can positively impact your annual federal tax return. Like the federal tax credit for electric vehicles (EVs), the Federal Solar Tax Credit aims to incentivize the installation of solar panels by offering a federal tax credit that can be applied toward taxable income. This solar tax credit is also known as a Solar Investment Tax Credit (ITC), which can also be offered to businesses that rely on a solar PV system.
As the number of homeowners installing solar PV generally continues to increase, the solar tax credit has also increased. In 2020 and 2021, the Federal Solar Tax Credit was capped at 26% of the total cost of the solar PV system. In August of 2022, however, this percentage was raised to 30%, which will remain until 2033. So, if your solar system is $20,000 and you purchase it during this time frame, you may claim the Federal Solar Tax Credit and have the solar tax credit cover $6,000 of your federal income taxes. It's worth noting that these tax credits have no cap, meaning there's no limit to how your income taxes can be reduced.
What Solar PV System Expenses Are Included?
Federal tax credits for solar are far from limited to the panels themselves, and homeowners can claim the solar tax incentive for all solar equipment and sales taxes pertaining to the purchase and installation. Other eligible expenses include, but are not limited to:
Permitting fees, inspection costs, and labor costs;
Solar PV panels for attic fans;
Fixtures and mounting equipment, and;
Energy storage devices over a specific wattage.
State Tax Incentives for a Solar PV System
In addition to federal taxes, homeowners can reap the benefits of installing a solar system by paying less state income tax. The amount of the state tax credit varies state by state and can pile on to the tax credit to reduce your overall tax bill. However, states without an income tax at the state level will be excluded from a state tax credit.
In some cases, solar manufacturers or utility providers will issue a one-time rebate after purchasing a solar power system –– because the electricity generated by a solar PV system can also help power neighboring homes. So, if your solar system (including installation, sales tax, and storage costs) was $20,000 and your utility rebate is $1,000, the reduced system cost will reduce your tax credit. Therefore, a $6,000 potential tax credit on your federal tax return for the subsequent tax year becomes $5,700.
Should You Make the Switch to a Solar PV System?
There are numerous advantages to switching to solar –– from potentially increasing your tax refund by seizing the federal investment tax credit to making your home more environmentally friendly. While the above information is designed to be useful, it does not constitute professional tax advice. If you'd like to learn more about solar installation's impact on your federal income tax, better understand state tax credits, or determine how to claim the Federal Solar Tax Credit, reach out to a tax professional.
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