Did you know that for the 2021 Fiscal Year (FY), the IRS collected more than $4.1 trillion in gross taxes? Individual, estate, and trust income taxes accounted for more than half of that.
And depending on your 2021 FY income, you may have paid 10% to 37% for federal taxes alone.
That’s a lot of money, but the good news is that solar tax credits can help give you a reprieve.
So what exactly are these solar tax incentives? How do they work, and how do you qualify?
Read on as this guide answers all those questions below.
What Are Solar Tax Credits?
Solar tax credits are dollar-for-dollar reductions you can claim on your income taxes. The primary source of these credits is the federal investment tax credit (ITC). However, several states also offer their residents a solar panel tax credit.
How Do Solar Tax Credits Work?
Solar tax credits allow you to claim credits on your income taxes when you invest in solar equipment. They can be for your federal income taxes alone, but if your state also offers such a program, you can apply for both. Either way, these incentives can reduce your overall tax bill.
If you qualify for the federal solar ITC this 2022, you can claim a 26% credit on the cost of your system. That goes down to 22% if you install and use your solar energy system in 2023.
Supposedly, the federal residential ITC expires in 2024 unless Congress renews it. However, a recent bill dubbed the Inflation Reduction Act of 2022 may extend it again. If it goes through, the ITC goes back up to 30% until 2032, then drops to 26% in 2033 and 22% in 2034.
State solar tax credits work the same way as the federal ITC does. The chief difference is that you claim the credits on your state taxes.
Not all states offer solar tax credits, and in those that do, the exact amount varies.
How Do You Qualify?
Apart from being a taxpayer, the other chief requirement to qualify for the federal ITC is to own the system. That means you have to buy the solar panels outright, either with cash or through a loan, and not lease them. You can view this page to learn more about available solar financing options.
As for states, they have varying requirements and aren’t always the same as the federal ITC. For example, New York doesn’t require its residents to own the panels. That means they can lease the solar equipment and still qualify for its 25% solar tax credit.
On the other hand, New Mexico implements a similar ownership rule as the federal ITC. Thus, if you install a solar energy system in NM, you must be its named owner to qualify for the 10% state tax credit.
Time to Go Solar for Less
And there you have it, your guide on how federal and state solar tax credits work. Now you know they allow you to reduce the taxes you’d owe the government.
It’s also worth noting that the cost of installing home solar panels has dropped by 60% in the last decade. That, plus all the tax credits you can get, should be enough reason to go solar today.
Are you interested in other energy-efficiency or money-saving guides like this? Then check out more of our latest blog posts now!