Solar tax credit

Key Takeaways

• The solar tax credit is formally called the Residential Clean Energy Credit, and it’s designed to encourage homeowners to invest in solar and other renewable-energy systems.
• The Residential Clean Energy Credit allows you to deduct 30% of the installation costs of renewable-energy systems from your federal taxes.
• The Residential Clean Energy Credit covers a broad range of costs related to purchasing and installing renewable-energy systems in your home, including solar panels, small wind turbines, and more.
• To qualify for the Residential Clean Energy Credit in 2024, you need to meet several eligibility requirements.
• Both the Residential Clean Energy Credit and the Energy Efficient Home Improvement Credit encourage energy efficiency, but they focus on different aspects of home energy use.
• You do not need to itemize your deductions to claim the Residential Clean Energy Credit.
• The Residential Clean Energy Credit is non-refundable, which means that the credit cannot exceed the amount of taxes you owe, and you will not get a refund for the difference.

What is the solar tax credit?

The solar tax credit, officially known as the Residential Clean Energy Credit, is a benefit provided by the government to encourage homeowners to use solar energy.

When you install solar panels or other qualifying renewable-energy systems in your home, this tax credit allows you to deduct a portion of the cost from your federal taxes. Essentially, it's like getting a discount on your tax bill for choosing cleaner energy to power your home.

This credit aims to make solar energy more affordable and accessible to more people. By reducing the initial cost of going solar, the government hopes to encourage a shift towards more sustainable energy sources.

This credit not only helps you save money on your taxes but also reduces your energy bills by powering your home with the sun.

How much is the solar tax credit in 2024?

In 2024, the solar tax credit, or the Residential Clean Energy Credit, is very beneficial for homeowners looking to go green. If you install a solar energy system in your home during the year, you can deduct 30% of the installation costs from your federal taxes. This means for every $1,000 you spend on your solar energy system, you get $300 back in tax credits.

There is no upper limit on the amount you can claim with the residential clean energy credit, making it a significant incentive for people installing large or expensive renewable systems. The 30% rate includes not just the solar panels, but also the labor for their installation, and any additional equipment needed. Costs like permitting fees and inspection costs are also eligible.

Given these benefits, 2024 offers a great opportunity to invest in solar technology and reduce both your tax bill and your energy bills.

Which residential expenses qualify for the Residential Clean Energy Credit?

The Residential Clean Energy Credit covers a broad range of costs related to the purchase and installation of renewable-energy systems in your home.

• Solar panels: Costs for purchasing and installing solar panels that generate electricity for your residence are fully eligible.
• Solar water heating systems: Expenses for solar water heating systems qualify, provided the system is certified for performance by the Solar Rating Certification Corporation (SRCC) or a comparable company. The credit is not available on solar water heating systems for a pool and/or hot tub. Note that at least half of the energy used by the water heating system must come from the sun.
• Geothermal heat pumps: The installation of geothermal heat pump systems that meet federal Energy Star guidelines also qualifies for the credit. These systems use the Earth's natural heat to provide heating, cooling, and even hot water.
• Small wind turbines: Costs for purchasing and installing small wind turbines that generate electricity for your residence are eligible. The turbines must have a nameplate capacity of no more than 100 kilowatts (kW).
• Fuel cell systems: Expenses for installing fuel cell systems are eligible, but these systems must have a minimum capacity of 0.5 kW and achieve at least a 30% efficiency rate. Unlike the other technologies, the credit for fuel cells is limited to $500 for each 0.5 kW of power capacity up to a maximum of $1,667 per .05 kW of power capacity per cell.
• Associated costs: Installation costs, which include the labor for the preparation, assembly, and original installation, as well as the piping or wiring to connect a system to the home, are also eligible.

Remember to keep all receipts and documentation related to these expenses as they will be necessary when claiming the credit on your tax return.

Eligibility criteria for the IRS solar tax credit

To qualify for the Residential Clean Energy Credit in 2024, you need to meet several important eligibility requirements:

• The solar energy system must be new or being used for the first time. The credit does not apply to second-hand equipment or systems that have been claimed for credits by another taxpayer previously.
• The system must be installed at your primary or secondary residence located in the United States. Both main and vacation homes are eligible if you own the property.
• You must own the solar system, either through direct purchase or financing. Systems that are leased or under a power purchase agreement, where you do not own the panels, are not eligible.
• The installation must be completed, as the credit is only available in the year your solar system becomes operational. It's beneficial to plan the installation as early as possible to ensure that it’s operational by the end of the year.

How to claim the IRS solar tax credit

Claiming the Residential Clean Energy Credit is straightforward if you meet the eligibility criteria. Here’s a step-by-step guide to help you navigate the process:

1. First, ensure you keep detailed records of all costs associated with the installation of your solar energy system, including equipment, labor, fees for permits, and any additional expenses related to the installation.
2. To claim the credit, you'll need to fill out IRS Form 5695, "Residential Energy Credits." This form calculates the credit amount that you can claim on your tax return.
3. After calculating your credit on Form 5695, you will enter the result on your federal income tax return. Specifically, you’ll include it on Schedule 3 (Form 1040), which is used for claiming nonrefundable credits.
4. File your tax return, including Form 5695 and Schedule 3, with the IRS.

Following these steps will help you successfully claim the solar tax credit, reducing your tax bill and supporting the initial costs of your solar installation.

What is the difference between the Residential Clean Energy Credit and the Energy Efficient Home Improvement Credit?

Both the Residential Clean Energy Credit and the Energy Efficient Home Improvement Credit encourage energy efficiency, but they focus on different aspects of home energy use. Understanding the differences between these two can help you determine which credit might be applicable to your situation.

Residential Clean Energy Credit

The Residential Clean Energy Credit applies to specific renewable-energy installations, including solar panels, solar water heaters, geothermal heat pumps, and small wind turbines at your primary or secondary residences. It covers 30% of the cost of buying and installing these systems, with no maximum limit, and is available through 2032.

Energy Efficient Home Improvement Credit

This credit targets energy efficiency improvements but not the installation of renewable energy technology. It includes things like new windows, doors, insulation, roofs, and heating and cooling equipment that meet specific requirements for energy efficiency standards. Homeowners can claim a credit for 30% of the costs, up to a lifetime limit of $1,200, with an additional $2,000 available for heat pumps, heat pump water heaters, and biomass stoves.

Key differences

• The Residential Clean Energy Credit focuses on renewable-energy installations, while the Energy Efficient Home Improvement Credit is geared toward improving energy efficiency through specific upgrades that do not generate energy.
• The Residential Clean Energy Credit is available for expenses on new systems that generate or use renewable energy, with a significant tax percentage and no cap. The Energy Efficient Home Improvement Credit applies to certain energy-saving products installed in existing homes, with caps on the amount that can be claimed.
• The Residential Clean Energy Credit is ongoing with a clear timeline until 2032 and no maximum credit limit, encouraging significant renewable installations. However, the Energy Efficient Home Improvement Credit has a more modest cap and is designed to incentivize smaller, incremental improvements in home energy efficiency.

By comparing these credits, homeowners can better plan their home improvements and energy upgrades, maximizing financial benefits while contributing to environmental sustainability.

Do I need to itemize to get the clean energy credit?

The good news is that you do not need to itemize your deductions to claim a tax credit, including the Residential Clean Energy Credit.

The Residential Clean Energy Credit is claimed as part of your tax return, but is independent of taking the standard deduction or itemizing your deductions. It is applied directly to your tax bill and can bring down the amount of taxes you owe to zero.

Is the Residential Clean Energy Credit refundable?

No, the Residential Clean Energy Credit is non-refundable, which means that while the credit can reduce the amount of taxes you owe to zero, it cannot exceed that amount. In other words, if your tax bill is less than the credit amount you qualify for, you will not get the difference as a refund.

For example, if you owe $3,000 in federal taxes and qualify for a $4,000 solar tax credit, your tax liability would be reduced to zero, but you would not receive the remaining $1,000 as a refund.

It’s important to note that while you cannot receive a refund for excess credits, you can carry forward unused portions of the credit to future tax years. This carryover allows you to potentially reduce the amount of taxes you owe in the future, providing a longer-term benefit, even if it’s not immediate cash back.

The Residential Clean Energy Credit significantly lowers the cost barrier for homeowners interested in solar panels and other renewable-energy systems.

Work with a Jackson Hewitt Tax Pro to help you navigate the complexities of claiming this tax credit and ensure that you claim every possible credit, deduction, and dollar you deserve as you invest in clean energy solutions for your home.

About the Author

Mark Steber is Senior Vice President and Chief Tax Information Officer for Jackson Hewitt. With over 30 years of experience, he oversees tax service delivery, quality assurance and tax law adherence. Mark is Jackson Hewitt’s national spokesperson and liaison to the Internal Revenue Service and other government authorities. He is a Certified Public Accountant (CPA), holds registrations in Alabama and Georgia, and is an expert on consumer income taxes including electronic tax and tax data protection.

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