How the Solar Energy Credit Can Benefit Your Tax Returns

Solar panels have emerged as a popular alternative source of energy as people seek sustainable ways of living. The federal government supports this effort by offering a solar energy tax credit to encourage homeowners to install solar panel systems on their homes. This credit provides financial incentives that can help offset the cost of installation, as well as provide long-term savings on energy bills. In this article, we will explore the solar energy tax credit and its benefits on tax returns.

Recent changes to the solar tax credit could increase the benefits on your federal income tax return.  The solar tax credit has been increased up to 30% of the installation cost through 2032. The credit will drop to 26% in 2033, to 22% in 2034 and to 0% in 2035 and thereafter (unless there are further changes).

To take advantage of this credit you must purchase qualifying solar property for your main home (most residential solar installations qualify).  Leased solar property does not qualify.

According to the IRS a home can include a house, houseboat, mobile home, cooperative apartment, condominium, and a manufactured home that conforms to Federal Manufactured Home Construction and Safety Standards. Your main home is generally the home where you live most of the time. A temporary absence due to special circumstances, such as illness, education, business, military service, or vacation, won’t change your main home.  Your main home could even be something you lease or rent from someone else (we recommend getting their permission before doing so).  However, if you are the owner of rental properties these do not qualify for the solar credit, the cost is usually depreciated over time.

What cost is included in the credit?

  • Cost of solar panels
  • Labor costs for installation, including permitting fees, inspection costs, and developer fees.
  • Any and all additional solar equipment, like inverters, wiring, and mounting hardware.
  • Energy storage systems rated three kilowatt-hours (kWh) or greater (starting in 2023).
  • Sales taxes on eligible expenses

You cannot include the cost of a new roof in the cost of your solar installation.  However, if there are structural improvements required to support the solar panels then that cost is included.  Also, solar roofing tiles and solar roofing shingles serve the function of both traditional roofing and solar electric collectors.  These solar roofing tiles and solar roofing shingles can qualify for the credit.

How does the credit work?

The credit is a non-refundable credit against your tax liability.  This means you get to take the credit in the current year up to the amount of tax liability in the current year and any additional amount rolls forward into the next tax year.  The credit can roll forward as long as the credit exist (currently until 2034).

You can take this credit once for each completed installation.  That is a separate system or major new addition to the first system.

For further information and to learn about the benefits of the Residential Energy Credit, contact the tax team at Smith Marion (909) 307-2323.

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