If you’re considering installing solar panels, you may have heard of the solar tax credit, also known as the federal solar tax credit. Current federal guidelines for solar tax credits were extended until 2022 when former President Donald Trump signed the Consolidated Appropriations Act 2021
The burning of coal, oil and natural gas for heat and electricity is responsible for about 75% of the greenhouse gas emissions in the US. These pollutants contribute to rising temperatures and sea levels worldwide, changes in weather patterns, and other factors related to climate change.
Renewable alternatives, such as, wind energy and , reduce the footprint caused by these fossil fuels. In the United States, several incentives exist for commercial and residential use of renewable energy, including the federal tax credit for solar energy. President Biden has already shown a strong interest in environmental issues by rejoining the on his first working day. That suggests the federal solar tax credit of 26% could be extended beyond the current deadline in late 2022, but the Biden-Harris government has not (yet) made any changes to the federal solar tax credit.
Read on to find out how you can take advantage of this tax credit.
A brief history
The Energy Policy Act of 2005 marked the beginning of the federal solar tax credit when it was signed into law by then-President George W. Bush. The first of the 550-page document describes the purpose of the law: “To secure jobs for our future with safe, affordable and reliable energy.” It describes a number of ways in which the US government is trying to address the energy challenges in the US, including providing tax incentives for “energy efficient homes”.
Here’s a snippet:
SEC. 25D. RESIDENTIAL ENERGY EFFICIENT PROPERTY. (a) AUTHORIZATION OF CREDIT. – In the case of a natural person, an offsetting of the tax levied by this chapter for the tax year will be allowed by an amount equal to the sum of – ” (1) 30 percent of the qualified expenses for photovoltaics properties made by the taxpayer during that year, ” (2) 30 percent of the qualified expenditure on real estate by the taxpayer by the taxpayer during that year … ”
Basically, it applies a dollar-for-dollar cut to the income tax you owe (for a percentage of the cost). The federal solar tax credit originally expired in late 2007, but has been renewed repeatedly. The initial 30% cut mentioned in the original law lasted through 2019, but has since changed to a tiered approach with the percentage decreasing steadily before the credit eventually expires.
The Energy Policy Act of 2005 then outlines eligibility for the credit, but this much shorter summary of the federal solar tax has all the important details without you having to search the full text of the law. Note that the summary has not been updated with the latest tax credit renewal dates, but the details about who qualifies will remain the same.
The summary details who is eligible, but here are the basic requirements:
- Your solar system must be installed in the calendar year in which the tax credit is active
- The system must be located in a primary or secondary residence in the US
- You must be the owner of the system and have paid either in cash or through financing
- The solar system has never been installed or used before
The federal solar tax credit rate fell to 26% in 2020 and is set to fall to 22% this year before expiring in 2022. Credit Act, 2021 in December 2020.
The tax credit today
The Consolidated Appropriations Act 2021 extended the tax credit from 26% until 2022. It will fall to 22% in 2023 and expire at the end of 2023.
For example, if you pay $ 14,000 for a solar panel system in 2021 (or in 2020 or 2022, for that matter), you qualify for a $ 3,640 tax credit. Keep in mind that other incentives provided by your state or utility company are not included in the total. So if you receive $ 4,000 in state or utility incentives, only $ 10,000 of the original $ 14,000 cost can be applied to the federal solar tax credit, bringing the total tax credit down to $ 2,600.
The good news is that you can buy solar panels with the expectation of getting a decent discount on your taxes. We will continue to monitor this tax credit over time and provide updates if any of the current provisions are extended after 2022 or changed completely. The deal may be extended again, but with the current step-down plan in the new law, if you do not use the 26% tax credit, you will receive less money back if you buy solar panels after 2022.
Learn more about state and other solar incentives here.