Using solar energy to power your home is a great way to help the environment, and the IRS wants to help you pay for it. Several states also offer tax credits for solar-powered and power-generating systems.
Federal Solar Tax Credits
The Energy Policy Act of 2005 first established a federal tax credit for solar photovoltaic and solar water heater systems; happily, this credit has been extended by the Consolidated Appropriations Act, 2016 out to the end of 2021 (the Act did not extend the deadline for most other types of energy tax credits).
The federal tax credit applies to both solar photovoltaic systems (a.k.a. solar panels) and solar water heaters placed in service between January 1, 2006 and December 31, 2021. Note that it's a non-refundable credit, meaning it can't reduce someone's tax bill below $0. Any excess credit is simply lost.
Tax Credit Amounts
- This credit can be up to 30% of the solar equipment's cost (including fees for installation) through 2019.
- The solar tax credit will drop to 26% of the equipment's cost for credits filed in 2020.
- It will drop further to 22% during 2021.
- After 2021, the credit will disappear unless Congress chooses to extend it again.
Tax Credit Requirements for Solar Panels
- The photovoltaic system must be used to provide electricity for a residence.
- It must be installed at a home the taxpayer uses at least part of the time as a residence. Second homes qualify for the credit, but rental properties do not.
- It has to meet fire and electrical code standards.
Tax Credit Requirements for Solar Water Heaters
- At least 50 percent the water heater's energy must come from the sun.
- Taxpayers can only claim a credit for the solar-heated part of the house's entire water heating system.
- The heated water must be used in the house. Systems used to heat water for swimming pools or hot tubs don't qualify.
- The system has to be certified by the Solar Rating and Certification Corporation (SRCC) or a comparable government-endorsed entity. For example, ENERGY STAR certified solar water heaters also qualify.
State Solar Tax Credits
A few states offer tax credits for various types of solar-powered and photovoltaic systems. To find out if your state has this type of program, see the Database of State Incentives for Renewables & Efficiency (DSIRE), where a complete list of policies by state is published. A few states with particularly generous state tax credit programs include:
Oregon residents who add solar power to their homes can claim a tax credit based on the amount of energy the system generates. This credit can be as much as $6,000 per residence, though it's limited to 50% of the cost of the system. Similar credits are available for new solar water heating and solar space heating systems.
Taxpayers who install a solar energy device at an Arizona residence can receive a tax credit of 25% of the cost of the device, limited to a $1,000 maximum. Each such device can qualify for the 25% back, but the total credit is capped at $1,000 per residence.
Solar energy devices include a wide range of active and passive solar equipment such as photovoltaic systems, water heaters, and daylighting systems (devices to collect and redirect sunlight inside the house).
Residents who buy or lease solar energy equipment are eligible for a tax credit of 25% of the cost of the equipment, up to a maximum credit of $5,000. This credit is non refundable, but can be carried forward for up to five years.
New York also exempts solar energy equipment from state sales taxes in several jurisdictions, including New York City.
Claiming a Solar Tax Credit
To claim the federal solar tax credit, file Form 5695 with your federal tax return. Taxpayers claiming a state tax credit will need to consult their state tax board's website or call for assistance to identify the correct form. You can find this information for your state on the American Institute of CPAS (AICPA) website. If the forms seem at all unclear, it's wise to consult a tax professional for advice.
Keep All Records
Keep all receipts or records related to buying the solar equipment for as long as you own the equipment. Should you suffer an audit on the tax return for which you filed the credit, the IRS will definitely want to see paperwork backing up your investment in qualifying equipment. This information can also be helpful for non-tax purposes, such as filing an insurance claim if the equipment is damaged.