Solar Tax Credit By State In 2024: The Ultimate Federal Solar Energy Tax Credit Guide

A tax credit is a direct reduction in the amount of tax an individual or business owes to the government. Unlike tax deductions that reduce taxable income, tax credits eliminate the actual tax liability, providing a dollar-for-dollar reduction in taxes owed. For instance, when you’re in the market for solar panels, the federal solar tax credit, also known as the Investment Tax Credit (ITC), aims to encourage investments in renewable solar energy.

The federal solar tax credit equals 30% of the solar system’s costs, reducing the taxpayer’s federal income tax liability by that amount. It applies to both solar panel equipment and installation costs but does not cover any structural modifications made to support the panel. It’s a one-time credit and is due to be reduced in 2033 and go away completely in 2035.

Additional state tax credits and solar incentives can vary in value. Some are fixed amounts based on qualifying steps taken or purchases made. Others, like the federal solar tax credit, offer a percentage of the total amount spent.

To qualify for the federal solar tax credit, the taxpayer must own the solar energy system. Those in a lease or a power purchase agreement (PPA) with the solar installer aren’t eligible for the tax credit, as they aren’t considered system owners. Additionally, the taxpayer’s tax liability has to cover the amount of the credit. Any remaining credit can carry over to subsequent years if the full amount isn’t met in that year’s tax bill.

Congress implemented the Inflation Reduction Act in 2022, which brought several significant changes to the solar tax credit. Most notably, it extended the timeline to 2035 and increased the credit amount from 22% to 30% through 2032. Those who installed a system in 2022 and haven’t claimed the credit yet can increase their credit amount to 30%.

Another key change was the expansion of eligible equipment to include energy storage devices with a capacity rating of 3 kilowatt hours (kWh) or more, including standalone storage. The U.S. Department of Energy strongly recommends pairing these storage devices with solar systems for enhanced benefits and energy capabilities.

The federal solar tax credit covers the following:

• Solar panels or PV cells
• Solar water heaters
• Energy storage devices with a capacity of 3 kWh or more
• Contractor labor expenses, including site preparation, assembly or initial installation
• Permit fees
• Inspection costs
• Developer fees

What isn’t covered:

• Roof repairs or replacements
• Tree trimming or removal
• Insulation
• Lighting

You may qualify for the federal solar tax credit if your installation meets these criteria:

1. Your solar system was installed between January 1, 2017, and December 31, 2034.
2. The system is located at your U.S. residence, which the IRS defines as somewhere you’ve lived in for the year in which you’re claiming, which can include a house, mobile home, houseboat, condominium, cooperative apartment and manufactured home.
3. You either own the solar system outright (bought with cash or financed but not leased or part of a power purchase agreement with the solar company) or you have purchased an interest in an off-site community solar project, with electricity credited against and not exceeding your home’s usage.
4. The solar system is new or in first-time use: the credit applies solely to the original installation of the solar equipment.

To be eligible for the federal solar tax credit, you need to install a solar-powered energy system that provides electricity to a U.S. residence. Solar panels, solar water heaters and energy storage devices are all included in the credit.

Solar Water Heaters

Solar water heaters feature a solar collector and storage tank, harnessing the sun’s thermal energy to heat the water. To qualify for the tax credit, solar water heaters must be certified by the Solar Rating Certification Corporation or a similar entity that your state endorses.

Solar Panels (Photovoltaic Systems)

Solar panels, or photovoltaic (PV) panels, are flat structures resembling windows that convert sunlight (in the form of photons) into electricity. There are three types of solar panels—monocrystalline, polycrystalline and thin-film—that can significantly decrease your electricity expenses.

Energy Storage Devices

Standalone energy storage devices with a capacity rating of 3 kilowatt hours (kWh) or more are also eligible for the solar tax credit. These do not need to be tied to a solar system to qualify.

After installing your solar panels, you will be eligible to claim your Investment Tax Credit the year the solar energy system is operational. Taxpayers can include the tax credit when they file their federal income tax return for that particular tax year. It’s also important to keep in mind that the eligibility criteria and specific rules for claiming the ITC may vary, so to receive accurate information on when and how to claim the ITC, it’s recommended to consult a tax professional or refer to the official IRS guidelines.

After purchasing and installing your solar power system, the tax credit can only be claimed once. You can work with your solar provider to obtain the necessary documentation and apply the credit to your taxes. Here are the steps to claim the solar tax credit:

1. Fill out IRS Form 5695 and include it in your tax return.
2. In Part I, calculate the amount of the tax credit.
3. Classify your solar system as “qualified solar electric property costs.”
4. On line 1, input your system’s total cost (do not include the cost of structural modifications to accommodate the system).
5. On lines 6a and 6b, perform the calculations.
6. On line 14, list any tax liability limitations (see the IRS instructions for Form 5695 for more information).
7. Complete the calculations on lines 15 and 16.
8. Enter the figure from line 15 on line 5 of your Schedule 3 (Form 1040).

Any unused portions of the tax credit that surpass the tax liability can carry over to next year’s taxes.

Most solar rebates, tax credits and renewable energy certificates for new solar customers won’t directly impact the solar ITC. However, they can reduce the credit amount if they lower the total cost of the installation. For instance, utility rebates are subtracted from your system costs before calculating the tax credit. Also, payments received for renewable energy certificates may be considered taxable income, potentially increasing your federal tax liability.

As for state government rebates, these generally won’t reduce federal tax credits. State tax credits for solar installation typically don’t affect federal costs directly. Still, claiming a state tax credit might raise reported taxable income on federal taxes due to reduced state income tax deductions, which can affect federal tax liability.

In addition to the solar ITC at the federal level, some states offer incentives for new solar system purchases. The Database of State Incentives for Renewables & Efficiency has specific details for each participating state.

State Tax Credits

Certain states offer additional tax credits for solar system purchases. These work similarly to the solar ITC, except the tax credit gets deducted from any state taxes owed. The amount of tax credit varies by state.

State Government Rebates

State government rebates for solar energy are typically a set amount of money given to those who purchase a solar system or other qualifying solar technology (e.g. solar water heaters and solar batteries). These are typically available regardless of whether or not the homeowner owes any federal taxes.

Solar Renewable Energy Certificate

Part of the EPA Green Power Partnership, a Solar Renewable Energy Certificate (SREC) is a state-level solar incentive. SREC markets operate based on renewable energy certificates that symbolize the rights to non-power aspects of renewable electricity generation. These SRECs represent each megawatt-hour generated from solar systems.

In states with SREC markets, homeowners and businesses with solar systems can lower their energy costs by selling associated SRECs to utility companies. Supply and demand determine the monetary value of an SREC, with much of the demand coming from electricity suppliers needing to comply with their state’s Renewable Portfolio Standard (RPS) or pay a compliance premium.

Along with rebates and tax incentives at the federal and state level, there are several other potential avenues to save on the cost of installing solar panels.

Local Utility Rebates

Local utility companies often offer rebates for installing a solar PV system. These subsidies are excluded from income taxes. The rebate amount is subtracted from the total solar system cost before calculating the solar tax credit.

Subsidized Loans

Subsidized loans offered by state entities or local utility companies aid in financing solar panel purchases. Solar installers can typically guide customers on available local solar programs, including subsidized loan options.

Tax Exemptions

Property tax exemptions allow homeowners and businesses to exclude the increased value from a solar system when assessing property taxes. Since property taxes are locally collected, some states allow local taxing authorities to offer this solar-related tax incentive.

Solar Renewable Energy Certificates 

Solar renewable energy certificates (SRECs) are another incentive that allows homeowners to earn a bit of extra income from running their systems. Simply put, users earn one SREC for every megawatt-hour, or 1,000 kilowatt hours, the system generates. If you live in a state with a market for SRECs, a broker will handle the sale to a local utility company. The value differs from state to state. This is basically a more complicated version of net metering. 

Net Metering

Net metering is a policy by which a utility company purchases overflow energy from a customer with solar panels. This is a great way to offset some of those initial installation costs. It’s sometimes referred to as net billing, though the terms aren’t exactly interchangeable. Net metering programs offer the retail value of electricity, while net billing only pays out the wholesale value. 

Many parts of the country offer state-governed net metering or net billing policies, such as California and Arizona. If your state doesn’t have a system in place, many utility companies offer some form of net metering program on their own. 

Now for some good news. You can stack the federal tax credit with any state tax credit, and the same is true with any state utility incentive intended to increase the adoption of solar panels. There’s one caveat: A state tax credit will increase the taxable income you report on your federal taxes, so the two are slightly intertwined in that way. Just make sure to file the initial claim the same year you install the panels. Once claimed, the various credits will carry over every year until the full balance has been applied. 

With tax credits and other benefits at federal, state and local levels, it’s a great time to go solar. While solar energy systems can be pricey upfront, the relief from these incentives and the long-term ROI of solar panels can make them a wise investment.