The cost of switching to solar energy in the United States is around 60% lower today than it was a decade ago. Part of the reason solar panels have become so attractive to homeowners is the reduced upfront cost of installation, as well as the potential cost savings on energy bills.

The availability of the federal solar tax credit is a driving reason why solar installation costs are so affordable. If you are planning to install a solar system on your property, it’s important to understand this incentive. In this solar tax credit guide, we will ask how does the solar tax credit work.

What is the Federal Solar Tax Credit?

The tax credit is a financial incentive to help homeowners in the United States make the switch to solar energy. For the rest of 2022, it will stand at 26%, representing a significant reduction in the cost of purchase and installation.

First created through the Energy Policy Act of 2005, it was introduced at a rate of 30%. It has been credited as a major reason for the large uptake of solar panels across the country.

In 2023, the tax credit is scheduled to decrease slightly to 22%. After next year, it is scheduled to expire unless it is renewed by Congress. As this is far from certain, now is the most opportune time to make the move to solar energy.

How Can Homeowners Claim the Tax Credit?

For homeowners who want to claim the tax credit, it is necessary to file form 5695 when loading their tax returns. Once the amount they are eligible for has been calculated, homeowners will be able to enter it on form 1040.

Homeowners are eligible for the federal solar tax credit as long as they have tax liability during the year in which they installed the solar panel system.

Note that homeowners must be the owner of the solar system in order to be eligible for the credit. This means that if a homeowner leases a solar system from a solar company, it will be company that is eligible for the credit rather than the homeowner.

We recommend that you speak to a solar panel installation company for more information on what is the solar tax credit. Check out this post if you are wondering is solar worth it (hint: it absolutely is!)

How Does the Solar Tax Credit Work?

The above information breaks down the federal solar tax credit for homeowners who have installed, or are planning to install, a solar panel system. In a number of US states, homeowners will also be able to take advantage of statewide tax incentives. Combined, state and federal tax incentives can greatly reduce the upfront cost of solar panel purchase and installation.

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