There is no cap on the exact amount your credit can add up to, and if you’re unable to claim the full credit in one year (meaning you don’t have a big enough tax liability to apply the credit to), then you can roll over the remaining credit to subsequent years.
Qualifying for the solar tax credit
To qualify for the solar tax credit, you have to be the owner (or eventual owner) of the solar energy system. That means if you used a Power Purchase Agreement or leased the system, you won’t be eligible.
If you’re using the credit on a residential property, you also have to live in the home, so if you rent your property out full time, that won’t qualify you either. (Though if it’s just a short-term rental and you live there some of the time, you can claim a portion of it.)
If you do qualify, claiming the tax credit is simple. Unlike a tax deduction, a tax credit is a dollar-for-dollar reduction of your total tax owed. That means if your tax liability were $10,000, for example, and your tax credit was worth $3,000, you’d only pay $7,000 in taxes that year ($10,000 - $3,000).
Claiming the federal solar tax credit
For commercial properties, the investment tax credit is only available if you began construction on your solar panel system in the tax year you’re filing. So if you started installing your solar system in December 2020, you could claim it on the returns filed next April -- even if the project isn’t finished for months or years to come. This would allow you to claim the maximum benefit of 26%.
For residential properties, the system must be placed into service before you can claim the credit. In the above scenario, if you started the system install in December 2020 but didn’t have it up and running until June 2021, you would claim the credit for tax year 2021 (filing by April 2022). That would mean a reduced credit of 22%.
In both cases, you’ll need IRS Form 5695 to claim the credit. You might also want to consult a tax professional just to be sure you qualify.
Federal solar tax credit FAQ
If you install solar power on multiple properties, can you claim the credit again?
Yes. You can claim the federal tax credit for any new system installed, as long it’s in a qualifying tax year.
Do I qualify if I bought a property with solar panels already installed?
If you purchased a new construction property with a solar system, then yes. You would then claim the credit for the year you purchased the house.
What if I co-own the property with my spouse, but we file our returns separately?
You can both claim a portion of the tax credit on your returns. You would simply claim an amount proportionate to your investment in the solar system.
I plan to install my solar panels myself. Can I still get the credit?
Yes and no. You can claim the credit on your equipment costs, any permits you need, and outside contracting work you bring in, but you can’t claim your own labor.
Is there a maximum income to claim the solar tax credit?
There is no income cap on the ITC program. You do, however, need a tax liability large enough to claim the full credit. If you don’t, you’ll need to roll the remaining credit over to another year.
Alternatives to the solar ITC
The solar investment tax credit isn’t the only potential tax benefit for installing a solar energy system. The IRS also offers nonbusiness energy property tax credits, though these are only available on primary residences.
Many states also offer incentive programs for property owners who go solar (Iowa currently has a 15% tax credit, for example), and many energy, water, and utility companies do, too -- often via rebates.
Here are some resources you might want to mine if you’re looking for ways to save via solar:
If you want to be sure you’re maximizing the potential tax benefits of any solar system you install, consider talking to a tax professional before going through with your installation. They can help ensure you’re fully compliant with any state or federal tax requirements prior to moving forward.
The bottom line
Installing a solar system can be a great way to reduce your property costs as well as your annual tax burden. If you’re looking for more ways to lower your per-property spend, look at ENERGY STAR-rated appliances or low-flow showerheads and toilets. Both can reduce your utility costs in the long run.