The federal solar tax credit, officially the “Residential Clean Energy Credit,” has become a popular incentive for homeowners to invest in renewable energy. The credit is here due to the Inflation Reduction Act (IRA). It allows eligible homeowners to deduct up to 30% of the cost of installing a solar energy system on their federal returns.
Notably, this tax break has led to a boom in solar installations across the United States.
Data show that last year was a record-breaking one for solar installations, with 51% more gigawatts of solar energy capacity installed than the prior year. (That’s according to a market report by the Solar Energy Industries Association (SEIA) and data analytics company Wood Mackenzie.)
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
To top it off, the IRS and the U.S. Treasury Department recently revealed that residential clean energy payouts to taxpayers have reached billions of dollars.
So, if you’ve been on the fence over whether to “go solar,” this tax credit might entice you to take the leap. But before you do, it’s also important to know that increased demand and interest in solar panel installations have led to a rise in scam solar contracts.
Here’s more of what you need to know.
IRS solar tax credit payouts top $6 billion
The IRS has paid billions in solar tax credits since the program's inception.
Recent data show that more than 1.2 million taxpayers took advantage of the residential clean energy tax credit, claiming a total of around $6.3 billion. That translates to an average of just over $5,000 in people’s pockets for each eligible claim.
- Rooftop solar panels were popular, with about 752,300 homeowners claiming credits specifically for those installations.
- Additionally, about 48,840 taxpayers reportedly claimed credits for battery storage systems.
How the solar tax credit works
The tax credit allows homeowners to claim 30% of the cost of installing a solar energy system on their federal income tax return. The credit reduces your tax bill, and if you end up with more credit than you owe in taxes, you can generally carry that over to future years.
Proponents of the incentive say it makes renewable energy more accessible by helping to reduce upfront solar installation costs.
Who can claim it? If you make clean energy improvements to your main home — including solar panels or solar water heaters — you’re likely eligible for the tax credit. Make sure the system is on a property you live in most of the time, and consult a trusted tax professional if you’re unsure of your eligibility.
How much is the tax credit? The solar tax credit covers up to 30% of the total cost of your solar installation, including the setup. There’s no maximum dollar amount for how much you can claim (the credit is based on a percentage of eligible costs).
Note: The tax credit will remain at 30% through 2032. After that, it decreases to 26% in 2033 and 22% in 2034.
This tax break generally applies to qualified expenses like:
- Solar electric panels and fuel cells
- Certified solar water heaters
- Labor costs for installation, prep, assembly
- Permitting fees and inspection costs
- Certain capacity battery storage technology
Use IRS Form 5695 when filing your federal tax return.
Beware of solar panel scams
While solar tax credit can be beneficial, the Consumer Financial Protection Bureau (CFPB) is warning about deceptive practices. Some companies are using misleading sales tactics and fraudulent contracts to exploit homeowners.
Scams can range from sending fake loan contracts to lenders to claiming inflated or non-existent tax credits or claiming you'll receive a rebate check from the government in the mail.
Specifically, the CFPB cautions to beware of:
- Promises of unrealistic savings
- High-pressure sales
- Hidden fees or escalating solar contract payments
- Companies claiming to be affiliated with government programs
To protect yourself, research solar installation companies and verify any claims that a given company is affiliated with a government program.
It’s also good to:
- Get multiple quotes from reputable installers
- Read contracts carefully before signing
- Be cautious of door-to-door sales pitches
Homeowner tax breaks: Bottom line
Given the popularity of solar installations and clean energy tax credits, it’s important to stay informed about the benefits and potential risks before signing any solar installation contract.
Also, don’t forget about other ways to lower your tax bill. The IRS offers several tax credits and deductions for homeowners and homebuyers and the IRA contains other clean energy incentives like the federal EV tax credit.
Related
- Tax Breaks for Clean Energy Home Improvement
- How the EV Tax Credit Works
- Tax Credits and Deductions for Homeowners and Homebuyers
- Should You Go Solar?
-
Dow Adds 314 Points to Thanksgiving Rally: Stock Market TodayInvestors, traders and speculators enjoy the best Thanksgiving Week gains for the major stock market indexes in more than a decade.
-
Why Prepaying Your Retirement Dreams Might Be a Financial Game ChangerHe bought his retirement home more than a decade before he plans to retire. Was it the right move?
-
My $1.2 Million Vacation Home Has a $360K Mortgage. I Don't Need My Upcoming $45K RMD. Should I Use It to Pay Down the Mortgage?We asked wealth planners for advice.
-
5 Simple Fixes to Save on Heat Bills This WinterWith fuel prices expected to rise 10% or more this winter, making your home more energy efficient will really pay off.
-
How Women of Wealth Are Creating a New Model of Giving Through Family OfficesWomen who are inheriting wealth today are shifting from traditional philanthropy to creating sustainable systems to fund philanthropic gifts into perpetuity.
-
Donating Stock Instead of Cash Is the 2-for-1 Deal You'll Love at Tax TimeGiving appreciated stock or using a donor-advised fund (DAF) this year would be smarter than writing a check to support your favorite causes. Here's why.
-
5 Charming Small Towns Where America's Wealthy RetireDiscover 5 small communities in the U.S. for affluent retirees — where charm outweighs the cost.
-
Here's What Being in the 2% Club Means for Your RetirementOnly 2% of the population has both a pension and more than $1 million saved. This is a great place to be, but also requires advanced tax planning.
-
Capital Gains Tax Quiz: How Well Do You Really Know IRS Investment Tax Rules?Quiz Take our capital gains tax quiz to test your investment taxes knowledge. Learn about loss rules, holding periods, and tax incentives that could impact your savings.
-
6 Tax Reasons to Convert Your IRA to a Roth (and When You Shouldn't)Retirement Taxes Here’s how converting your traditional retirement account to a Roth IRA can boost your nest egg — but avoid these costly scenarios.
