Qualifying For and Using the Federal Tax Credit

The federal solar tax credit, also known as the investment tax credit (ITC), allows you to deduct 30 percent of the cost of installing a solar energy system from your federal taxes, for systems installed by December 31, 2019.

First placed into law through the Energy Policy Act of 2005, the rules were significantly changed in 2016 and renewed in 2018. Residential and commercial solar energy systems are subject to different credits in the future. For homeowners, the ITC will sunset in 2022, with scheduled reductions along the way. The ITC for residential solar energy systems is defined this way:

Maximum Solar Electric Tax Credit

  • 30% for systems placed in service by 12/31/2019
  • 26% for systems placed in service after 12/31/2019 and before 01/01/2021
  • 22% for systems placed in service after 12/31/2020 and before 01/01/2022

Qualifying For and Using the Federal Tax Credit

When you own your solar energy system, you are automatically eligible for the solar tax credit. Even if you don’t have enough tax liability to claim the entire credit in the first year, you can “roll over” the remaining credits. When a third party owns the system, they receive the corresponding credit.

A change allowed with recent updates, the program no longer requires a system to be fully operational to qualify within a tax year. The most recent legislation allows the system owner to claim it as soon as the construction of the system is complete, as long as it is operational by December 31, 2023.

The solar energy system must service a dwelling unit located in the United States that is owned and used as a residence by the taxpayer.

To be clear, the tax credit does not require the structure to be the principal or permanent residence for the owner.

Valid expenditures subjected to the credit include labor costs for on-site preparation, assembly or original system installation, and for conduit or wiring to interconnect a system to the home. A reputable solar installer will note exactly what charges are eligible.

There is no limit on the credit that can be applied to the system owner’s applicable taxes. However, state incentives can be more restrictive and limit the sizing of a residential solar energy system. For more details visit the Massachusetts Solar Incentives and Rhode Island Solar Incentives pages.

The Federal Tax Credit Future

It is difficult to predict whether the U.S. Congress will consider a future extension to the ITC policy at any point before it is scheduled to sunset for household solar energy systems.

However, the current credit schedule highlights the importance of acting quickly to maximize your benefits, if possible. For example,
making a solar power investment in 2020 results in a loss of 4% in tax credit value. For the average residential solar energy system in Massachusetts and Rhode Island, that could translate to $750 to $1,000 in savings left behind.

In other words, as the ITC goes through its scheduled reduction homeowners will see less credit — a value equal to many months of utility savings.