Solar panel tax credits: How they work

The federal residential solar energy credit currently gives homeowners up to a 26 percent credit on the net cost of a solar energy system placed in service between 2020 and 2022 (Businesses also can get a credit, but that’s a slightly different program). Systems installed before Dec. 31, 2019, were eligible for a 30 percent tax credit.

The credit represents a dollar-for-dollar reduction in the amount of income tax you owe — if the system costs $10,000, for example, you can receive a credit of $2,600 toward your tax payment.

Consumer Affairs says the average cost to install solar panels in the United States is about $12,000 after federal tax incentives.

The rate is scheduled to drop to 22 percent in 2023 and sunset for homeowners in 2024. For businesses, it’s scheduled to drop to 10 percent in 2024 and remain. There’s also a rollover that may allow you to carry over a leftover amount into future years.

Some states have additional tax credits, so check with your accountant.

A few things to be aware of, according to the federal Office of Energy Efficiency and Renewable Energy:

* You can’t claim the tax credit on rental properties you own, though you can claim a portion if you live at the property for at least part of the year.

* If you receive a rebate from your utility to install a solar PV system, it is likely excluded from income taxes, which means the utility rebate for installing solar is subtracted from your system costs before you calculate your tax credit. In the example of a $10,000 system, if your utility gave you a $1,000 rebate, your tax credit would be 26 percent of $9,000 instead.

* Rebates from state governments generally do not reduce your federal tax credit.

* While state tax credits do not reduce federal tax credits, the taxable income you report on your federal taxes will be higher because you have less state income tax to deduct. Still, you can claim multiple tax credits to bolster your total cost reduction. After doing the math (it’s not straight addition), a homeowner in New York who claims the state and federal tax credits can knock $8,190 off of an $18,000 system.