Homeowner’s Guide to the Federal Tax Credit for Solar Photovoltaics
Disclaimer: This guide provides an overview of the federal investment tax credit for residential solar photovoltaics ( PV). (See the Federal Solar Tax Credits for Businesses for information for businesses). It does not constitute professional tax advice or other professional financial guidance and may change based on additional guidance from the Treasury Department. Please see their published Fact Sheet for additional information. The below guide should not be used as the only source of information when making purchasing decisions, investment decisions, tax decisions, or when executing other binding agreements.
Photo courtesy of Dennis Schroeder, National Renewable Energy Laboratory.
What is a tax credit?
A tax credit is a dollar-for-dollar reduction in the amount of income tax you would otherwise owe. For example, claiming a 450,000 federal tax credit reduces your federal income taxes due by 450,000. The federal tax credit is sometimes referred to as an Investment Tax Credit, or ITC, though is different from the ITC offered to businesses that own solar systems.
The federal residential solar energy credit is a tax credit that can be claimed on federal income taxes for a percentage of the cost of a solar PV system paid for by the taxpayer. ( Other types of renewable energy are also eligible for similar credits but are beyond the scope of this guidance.)
The installation of the system must be complete during the tax year.
Solar PV systems installed in 2020 and 2021 are eligible for a 26% tax credit. In August 2022, Congress passed an extension of the ITC, raising it to 30% for the installation of which was between 2022-2032. ( Systems installed on or before December 31, 2019 were also eligible for a 30% tax credit.) It will decrease to 26% for systems installed in 2033 and to 22% for systems installed in 2034. The tax credit expires starting in 2035 unless Congress renews it.
There is no maximum amount that can be claimed.
Am I eligible to claim the federal solar tax credit?
You might be eligible for this tax credit if you meet the following criteria:
- Your solar PV system was installed between January 1, 2017, and December 31, 2034.
- The solar PV system is located at a residence of yours in the United States.
- You own the solar PV system (i.e., you purchased it with cash or through financing but you are neither leasing the system nor nor paying a solar company to purchase the electricity generated by the system).
- Or, you purchased an interest in an off-site community solar project, if the electricity generated is credited against, and does not exceed, your home’s electricity consumption. Notes: the IRS issued a statement (see link above) allowing a particular taxpayer to claim a tax credit for purchasing an interest in an off-site community solar project. However, this document, known as a private letter ruling or PLR, may not be relied on as precedent by other taxpayers. Also, you would not qualify if you only purchase the electricity from a community solar project.
Solar Power in Texas
As one of the largest states in the country, it is obvious that Texas has a high demand for electricity; look at its massive size and population. The residents and industries rely heavily on energy for various needs, and it is no wonder solar power is becoming popular in the state.
Solar energy Texas makes a lot of sense in the state because, as you already know, the region receives some of the strongest and longest sunshine hours.
After California, Texas is next in line in terms of the highest solar power generation, and the numbers currently stand at 12.4% of the nation’s total, which is pretty impressive.
This is because of the number of sunlight hours each day that the state receives. The total daily peak sun hours for Texas vary by county, from roughly 4 to nearly 7 each day.
The state’s solar industry was still lagging behind about a decade ago. But now, things have radically changed, and Texas is now one of the highest producers and consumers of renewable energy.
Besides the high demand for solar power, the growth of the industry can be highly attributed to the fact that the local and federal governments have widely popularized rebates for solar panels.
There are now so many Texas solar incentives from the local government: the state offers property owners the chance to receive tax relief whenever they install solar power. It is welcome news for homeowners, and it explains why now is the best time to embrace renewable energy.
What Is the State of Solar Power in Texas?
Based on findings from SEIA, more than 200,000 homes in Texas have fully adopted solar power, but on the other hand, the commercial sector is still developing at a slow pace. 2
While the energy is taking a minute to gain more ground, there is a ray of hope for the industry because the local governments are adopting solar energy tech to help supplement their needs.
Just recently, Austin made major strides by purchasing a 150 MW solar power plant to increase the city’s energy supply.
On the plus side, that, together with wind power, means that it is only a matter of time before Austin can have more than half of its energy supply coming from renewable energy. 9
Why Go Solar in Texas?
Texas is massive, and so is its residential electricity bill. It is shocking that the residential energy costs are about 20% higher than that of the national average, and it goes without saying that something must be done to ease this burden.
Waterbury Solar Panel Installation 2023 | Solar Company CT | Premier Improvements Solar
If you have often had issues with your energy uses and want a break from the hefty utility costs, maybe it is the perfect time to go solar.
By location, Texas is one of the best places to set up solar panels, why? For one, it receives a whooping 300 sunny days a year, which cannot be said for states in the north.
It is way better than most parts of the country, especially considering that the American average stands at 205 days of sun annually.
Obviously, its position makes it the perfect spot for harnessing solar power. In fact, it is no surprise that the state is number 2 in the entire country when it comes to installation of PV systems.
Another thing to celebrate about Texas’ adoption of solar power is that there is a ready market, considering that the towns are larger and the population is equally massive.
The icing on the cake is the fact that there are Texas solar incentives and federal energy credits to help boost you if the cost of solar panels in Texas seems overwhelming.
Another strong reason why you should go solar in Texas is the impact it has on your property or home. Findings show that the average home with solar panels installed increases in value by 4.1%, and that should tell you a lot about the solar market. 1
Buyers will never complain or haggle much when the house already has PV systems installed because, basically, it means reduced cost on their electricity bills.
Net metering and solar buyback programs in Texas
Net metering and solar buyback programs give money back to households with solar panels that generate more electricity than they consume. Texas doesn’t have a state net-metering program, but local electric providers and municipal power companies have their own plans that compensate customers for giving energy back to the grid.
Net metering plans generally give customers credit toward their electric bill for any surplus energy generated, up to their amount of their total electrical bill. Solar buyback programs may instead pay solar energy producers money directly for excess electricity. Credits for surplus energy are calculated by multiplying a fixed rate by the kilowatt-hours generated back into the system. Some utilities use the terms interchangeably or have unique terms of their own for similar programs.
The following Texas utilities provide net metering or solar buyback programs for their customers. This list of providers is not exhaustive. Be sure to check with your electric company to see if it offers net metering for excess solar energy production.
Austin Energy gives money back to customers who provide excess solar energy to its grid using what the utility calls a Value of Solar rate. That VoS rate depends on the size of the solar system. Solar installations with capacities under 1 megawatt AC currently receive 9.91 cents per kWh, while installations larger than that get 7.24 cents per kWh.
Brenham distributed generation program
The municipal electric utility operated by the city of Brenham provides money back for surplus energy generated by solar panels, usually in the form of credits on electric bills. The excess energy put back into the Brenham electrical grid will be paid based on a avoided cost of generation rate equal to the wholesale cost Brenham pays its commercial energy providers.
Brownsville PUB solar buyback program
The city of Brownsville will buy back excess electricity generated from solar panels, at the same price that it pays other solar energy providers. The current rate for that electricity is about 6 cents per kWh, but the rate was under 3 cents for several years.
CPS Energy in San Antonio reimburses customers with surplus solar energy at what it calls the avoided cost rate, according to the Database of State Incentives for Renewables Efficiency. That means that customers are credited for excess energy based on the rates that CPS Energy would have to pay for it elsewhere.
El Paso Electric
Like CPS Energy, El Paso Electric also provides a net metering program that reimburses customers for excess solar energy at the same rate that the utility would pay for that electricity if it acquired it from a commercial provider.
Green Mountain Energy
The Renewable Rewards solar buyback program from Green Mountain Energy provides customers with bill credits when they provide excess energy back to the utility. The excess energy credits are capped at your total energy usage from the grid.
We weren’t able to find current rates for excess solar energy on the Green Mountain website, but the example on the Renewable Rewards page shows a rate of 13 cents per kWh.
Reliant’s Solar Payback Plan provides net metering for its customers with solar panels. Participants receive unlimited bill credits for the surplus solar energy that they generate. The plan is available to all customers with solar installations smaller than 50kW capacity who have existing interconnection agreements with their utilities.
Shell Energy solar buyback program
Serving Texas energy customers across the state, Shell Energy Solutions gives credit for the excess energy that customers with solar panels create. The money back is provided in the form of renewable energy certificates.
Shell doesn’t advertise its payment rate for excess solar energy. Its residential terms of service state that credit value will be established when a customer enrolls in the solar buyback program.
TXU Energy provides net metering for customers across the state. Its Home Solar Buyback program reimburses customers for excess solar or wind energy up to 100% of their electrical bills. However, any excess energy you generate that goes beyond your billing does not carry over to future months.
Federal solar tax credits and incentives for Texans
The federal solar tax credit might be the most valuable incentive for installing solar panels in Texas. Technically called the residential clean energy tax credit, the incentive gives eligible taxpayers 30% of the cost of their solar panel installation back as a credit on their federal taxes.
Georgia Power Solar Program
The tax credit is nonrefundable, meaning it can only be used to offset the taxes you’d otherwise owe, but extra amounts can be carried over to future tax years. There’s no limit to the amount of the tax credit for solar panel installations.
To claim the federal solar tax credit, taxpayers should file IRS Form 5965, which is easily managed by all of the best tax software.
Texas solar power purchase agreements
Solar power purchase agreements allow customers to add solar panels to their homes without paying for the installation or maintenance. Customers then lock in a rate for that solar power that’s lower than what they usually pay for electricity.
While solar power purchase agreements let customers get solar power with no upfront costs, there are a few important disadvantages to note. Since you don’t own the solar panels and equipment, you can’t take the federal solar tax credit and won’t qualify for most local solar incentives. Also, the solar power purchase agreement will be tied to your home for the length of the contract, making it potentially more difficult to sell your house.
Solar power purchase agreements are legal in Texas, though they seem more common at solar companies, not electric utilities. Alba Energy, Sunnova and Wells Solar are three major solar companies currently providing solar power purchase agreements to Texans.
Texas community solar programs
Community solar projects help provide solar energy to electric customers who don’t own their homes or can’t afford to install solar panels. Instead they join a community with a large-scale industrial solar panel installation and then purchase the renewable energy it provides, getting the environmental and economic benefits of solar energy without installing panels on their property.
Some Texas community solar programs are currently at capacity, but they all suggest joining their waiting lists for when spots become available.
The following Texas electric providers provide community solar projects:
- Austin Energy
- Bandera Electric Cooperative (northwest of San Antonio)
- CoServ (Dallas area)
- CPS Energy (San Antonio)
- El Paso Electric
- Midsouth Solar Energy (north of Houston)
- Pedernales Electric Cooperative (west of Austin, north of San Antonio)
- TXU Energy
- United Cooperative Services (west and south of Dallas)
Green Mountain Energy offers a program that’s similar to community solar but with a twist. Instead of purchasing your electricity from one community solar project, Green Mountain’s Go Local Solar plan buys renewable energy certificates that are used to purchase your power from multiple solar installations across the state.
How does the federal solar tax credit work?
The US government offers some of the best tax incentives for solar panels. As of 2022, you can now qualify for up to 30% of the total cost of your solar system as a tax credit.
Virtually any solar installation completed between 2017 and 2034 is eligible, but you can read detailed guidelines here. There are no income limits for the program, but because this incentive will come as a tax rebate, you do need to have taxable income to benefit from the credit, Fasullo said.
The total cost of the solar panel system, for the purposes of this program, includes not just the panels themselves, but also labor, installation and energy storage equipment.
What states have the best solar incentives?
Each state has a different mix of tax credits, rebates and net-metering policies that can offset the cost of a solar installation.
The economics, even without the tax credit, makes sense, Fasullo said of installing solar on your home. But these programs can sweeten the pot even more.
Here are the top seven states for solar incentives.
Residents in New York can access a few different incentives. On the tax credit side, customers qualify for 25% of the solar system cost, up to 5,000. They can also qualify for sales tax exemptions, and if your solar panels generate excess power, net metering will pay you about
Why are some states more solar-friendly than others?
The solar tax credits that are available in your state depend largely on the utility companies.
Solar panels, because they allow you to generate your own electricity and rely less on the grid, have forced utilities to reshuffle their decades-old business model of building power plants and sending energy to households, Fasullo said. Not to mention the fact that, if your solar panels generate excess electricity, the utility has to start paying you.
All the utilities are scrambling because their business model is under attack, he explained. The less progressive utilities view [solar panels] as a threat.
So, in the states where utilities are still resisting solar panels, the incentives are likely to be less generous.- or just totally nonexistent. And in states where utilities have embraced solar, the rebates will be a lot stronger, Fasullo said.
Educate yourself on your utility, he advised. That could translate to rebates at the Hyper-local, municipal level, too. If your state doesn’t offer rebates, sometimes your town or city might step up to fill the gap.
.69 to 450.09 per kilowatt per month.
Homeowners in Idaho can qualify for some significant rebates. The state offers a tax deduction of 40% of the cost of a solar system applied the year of installation, then a 20% deduction the following three years. Net metering policies will vary by utility, but the state also offers low-interest loans to help fund solar installations.
Illinois is another state where, if you fall into the income requirements, you could qualify for a free solar installation. Other incentives include renewable energy credits that could cover about a third of the cost of a system, and property tax adjustments to lower your tax bill.
Maryland residents have a few solar tax incentive options. Lower income customers can have the total cost of a solar installation covered by grants. The state also offers exemptions from sales tax and property tax increases. Net metering and solar renewable energy certificates in the state allow homeowners to gain extra income from the energy their panels generate, too.
In Oregon, the incentives you can expect depend somewhat on your utility provider. Anyone in the state can access up to 5,000 off the cost of qualifying solar systems. But utility companies also offer rebates of as much as 450,500, as well as net-metering opportunities. Customers building new homes can also get an incentive to throw solar on the roof.
The South Carolina Solar Tax Credit is one of the most generous out there. It offers a tax credit of 25% of the cost of a solar panel system, up to 35,000 or 50% of the taxpayer’s tax liability for the year. The state also offers some property tax exemptions and net metering programs. Plus, Santee Cooper customers can qualify for another 5,700 rebate.
The state of Texas has a big range of solar incentives that depend a lot on where you live and who your energy provider is (the state’s energy system is deregulated, meaning customers can choose their utility). Some of the available rebates include a 5000,500 credit for customers in Austin, as well as net metering programs that vary by utility.