Federal solar tax credit in 2024: How does it work?

If you’re a homeowner who wants to go solar, now is a great time to take advantage of government incentives like the federal solar tax credit.

The federal residential solar tax credit is the most valuable incentive you can claim this year because it saves you thousands of dollars in the form of a 30% tax credit. There’s no limit to the amount you can claim.

We’ll walk you through what you need to know about qualifying for the federal solar tax credit and taking advantage of all the state and local incentives available where you live.

Disclaimer: This article is intended to provide an informational overview of the federal solar tax credit for interested homeowners. It is not intended to serve as official financial guidance. Readers interested in installing solar products should use their best judgment and seek advice from a licensed tax professional.

The federal solar tax credit, commonly referred to as the investment tax credit or ITC, allows you to claim 30% of the cost of your solar energy system as a credit to your federal tax bill. If it costs $10,000 to install your solar panel system, you’ll receive a $3,000 credit, which directly reduces your tax bill.

On average, a typical  EnergySage Marketplace shopper saves an extra $9,716 on their solar costs when they claim the ITC. This assumes an average system size of around 11 kW with a price tag of $32,386 before incentives.

The tax credit will remain at 30% until 2033, when it’s scheduled to drop down to 26%.

The ITC was set to expire in 2022, but was extended until 2034 as part of the Inflation Reduction Act. The solar investment tax credit is now available to homeowners in some form through 2034. What year you install your system determines how much of your solar costs you can claim as a credit:  

The federal solar tax credit is valuable because it's a dollar-for-dollar reduction of your federal tax bill. It's different than a rebate or a deduction because it directly reduces what you owe in taxes. There is no income limit on the ITC program, so taxpayers in all income brackets are eligible.

You’re eligible for the solar investment tax credit if you own your solar energy system. If you signed a lease or power purchase agreement (PPA) with a solar installer, you are not the system's owner and cannot claim the tax credit.

You need to owe taxes in order to receive a tax credit, so make sure you're receiving a tax bill in 2024 if you want to use your credit this year. If you don't have a large enough tax bill to claim the entire credit in one year, you're able to roll over the remaining credit amount each year until the ITC expires in 2034.

When to claim the ITC

It's important to keep in mind that you need to file for the ITC during the year your system is installed and you're given permission to operate (PTO) from your utility grid. It can often take two to three weeks or longer to receive PTO from your utility company, so you'll want to double-check that the year your system was installed is the same as the year it's turned on.

For example, if your solar panel system was installed in December 2023, but you didn't receive PTO until January 2024, the year you want to file for the ITC is 2024 -- the year your system became operational.

What is (and isn't) covered by the ITC?

Only certain solar equipment and related expenses are eligible for the 30% tax credit, so make sure to double-check what specific items fall under the ITC before you have anything installed.

Aside from the ITC, there are many worthwhile state-sponsored rebates and incentives to take advantage of depending on where you live. For example, if you go solar in Florida you can benefit from its state-specific tax exemptions such as not having to pay any sales tax on your solar purchase, as well as not having your property taxes increase despite the added value to your home.

Here are some of the financial incentives you can benefit from in addition to the federal solar residential tax credit:

• Rebates from your utility company: Net metering is an example of one of the most common types of credits you can receive from your utility company.

• Net metering: Net metering is a billing mechanism that allows you to receive credits on your utility bill for any excess electricity your solar energy system generates and sends back to your local grid.

• Rebates from the state: If you receive a rebate from your state there is no impact on whether you can claim the ITC or other solar incentives. However, it may affect your taxable income so be sure to consult with a licensed tax professional when claiming local rebates.

• State tax credit: Individual states offer their own solar credits in addition to the ITC, but policies vary greatly depending on your location.

• Payments from renewable energy certificates (SRECs): Similar to net metering, SCRECs allow you to earn money for the electricity your solar panels generate.

You claim the investment tax credit for solar when you file your yearly federal tax return. If you work with an accountant, make sure to let them know you've installed solar on your property in the past year. If you file your own taxes, you can use EnergySage's step-by-step guide for how to claim the solar ITC. You'll need to fill out IRS Form 5695 and other tax forms to ensure you receive your tax credit.

Here's how to claim the ITC in 2024:

1. Determine if you're eligible: You must own your solar energy system to qualify for the federal solar tax credit. If you lease your system, you can't claim the ITC. You also need to have a tax bill in order to receive your federal solar tax credit, so make sure you have enough tax liability to qualify this year, otherwise you have to roll your credit over to the following year.

2. Complete IRS Form 5695: You can use the EnergySage guide for filling out 5695 if you're filing your taxes yourself. Otherwise, make sure you have all of the supporting documentation from your solar installation ready to go for your accountant to file Form 5695 for you.

3. Add to Schedule 3 and Form 1040: Once you've completed IRS Form 5695, you'll need to use some of that information to fill out Schedule 3, which allows you to claim both nonrefundable credits (like the ITC) as well as refundable credits. Once you've also filled out Schedule 3, you'll need to fill out Form 1040, which is the principal form you use to file your tax return.

Federal policies and incentives that support solar investments have increased significantly in recent years, and solar deployment has grown nationwide on both a distributed and utility-scale level. The federal tax credit has allowed more businesses, homeowners, and taxpayers to invest in solar, driving down solar costs while increasing long-term energy stability.

It's proved enormously successful: According to the Solar Energy Industries Association (SEIA), it has helped the U.S. solar industry expand by more than 200% over the past two decades.