The Federal residential solar energy credit is a nonrefundable tax credit limited to 30% of the installation cost of the solar panels. This means it is a dollar-for-dollar reduction in your total Federal tax owed but if it exceeds the total tax owed, the excess must be carried forward and not refunded directly to you. Tax credits also do not change your overall tax bracket or impact your taxable income. Let’s use a dollar example to clean that up:
- You installed solar panels in 2022 at a total cost of $30,000
- First, we can calculate the credit as 30% of $30,000 = $9,000
- Next, we’ll calculate your Federal tax on your income tax return as normal based on your taxable income for the year. We’ll skip the nitty gritty of tax calculations so we don’t put everyone to sleep and say the tax calculation came out to $5,000
- We can only use $5,000 of the Federal residential solar energy credit to reduce the total tax to $0. The remaining $4,000 of the credit would be carried forward to next year and available to reduce any tax liability on the 2023 tax return.
- Now that we have a broad overview of how the residential solar energy credit impacts taxes, let’s look at some of the other details related to the credit.
Eligibility Requirements:
- When? The installation of the solar system must be completed during the tax year in which you are claiming the credit. For solar systems installed in 2022 and on to 2032, the tax credit is equal to 30% of the installation cost. In 2033, that percentage will begin to phase out (if no changes are made from Congress)
- Where? The solar system must be installed at your residence in the US – the key here is that it can be installed at a vacation or 2nd home and still qualify for the credit but it cannot be claimed if installed on a rental property (that may be eligible for a different credit, but not this particular Federal residential solar energy credit).
- What? In terms of calculating the credit, the total installation cost is quite generous as defined by the IRS and includes the Solar PV panels or PV cells, contract labor costs, balance-of-system equipment, energy storage devices and even the sales tax on the eligible expenses. Generally, your invoice for the installation of the Solar Panels will suffice with your tax preparer to calculate that credit available. The installation must be the “original” installation or first installation of the solar panels.
- Note: You must have purchased the solar system (cash or financing) as opposed to leasing.
- How much? There is no maximum to the amount of credit that can be claimed and any unused credit in the tax year can be carried forward indefinitely.
And, don’t forget the state tax credit! In South Carolina, the tax credit is calculated as 25% of the cost of installing the solar energy system. However, South Carolina only allows you to use up to $3,500 per year or ½ of the current year tax liability, whichever is less.
- So, if we go back to our $30,000 solar install cost up above, our SC Income tax credit would be calculated as $30,000 * .25 or $7,500.
- However, our SC total tax calculated on our tax return is $1,800. We can only use $900 of the credit on the current year tax return (the lesser of ½ of the tax liability or $3,500).
- The remaining $5,500 will be carried forward for up to 10 years.
What does this mean for you? There may be an optimal tax strategy when timing the installation of these solar panels. For example, in years of higher income, you would be able to take advantage of more of the tax credit in the current year. Reach out to your financial advisor or tax preparer to determine how to maximize the tax benefits if you are considering installing solar panels.