Barry Dolowich, Tax Tips: Solar tax credit

Question: We are considering installing solar panels on our home and are very confused with all the available options and the benefits of the tax credit. We also feel insecure about trusting all that the salesman tells us! Is it possible for you to simplify the issues for us?

Answer: First, you need to understand the value of a tax credit. A tax credit is a dollar-for-dollar reduction or offset of your actual income tax. A tax credit is much more valuable than a tax deduction. The value of a tax deduction is measured by multiplying the deduction by your marginal tax rate, far less than a dollar-for-dollar tax credit.

The federal residential solar tax credit can be claimed on your federal income tax return and is calculated by calculating a percentage of the cost of a solar photovoltaic (PV) system. The system must be placed in service during the tax year and generate electricity for a home located in the United States. The 2022 Inflation Reduction Act retroactively reinstated the full 30% (previously reduced) for eligible expenditures placed in service after 2021. The full 30% tax credit is now available through the end of 2032, and is phased down to 26% in 2033 and then to 22% in 2034.

You may be eligible for the solar tax credit if you meet the following criteria:

The solar PV system is located at your primary or secondary residence in the United States, or for an off-site community solar project, if the electricity generated is credited against, and does not exceed, your home’s electricity consumption. The IRS has permitted a taxpayer to claim a Section 25D tax credit for the purchase of a portion of a community solar project.

You own the solar PV system by purchasing it with cash or through financing. No credit is allowed if you are leasing the solar PV system or in an arrangement to purchase electricity generated by a system you do not own.

The 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.

The following are the expenses that qualify for the solar tax credit:

• Solar panels, or PV cells used to power an attic fan.
• Contractor labor costs for onsite preparation, assembly, and original installation, including permitting fees, inspection costs and developer fees.
• Balance-of-system equipment, including wiring, inverters, and mounting equipment.
• Energy storage devices that are charged exclusively by the associated solar PV panels, even if the storage is placed in service in a subsequent tax year to when the solar energy system is installed.
• Sales taxes on eligible expenses. For example, if you and your husband spend $20,000 in 2022 on your solar PV system and place it in service prior to December 31, 2022, you can receive a solar tax credit in the amount of $6,000 (30% x $20,000) to offset your 2022 federal tax. Any unused credit can be carried forward.