Can you get a tax credit for solar panels?
Tax credits can help make solar panels a great investment for homeowners. Fortunately, there many federal and state credits available.
Homeowners who want to go solar are usually interested in helping the environment, but for many people the top reason for adding solar panels to their house is to save money.
Fortunately, everyone in the United States can be eligible for a federal income tax credit, which is currently worth 30% of the total system costs. For example, if you have a solar system with an invoice price of $20,000, the credit can reduce the amount of federal income tax you owe by $6,000.
Many states offer tax credits on state income taxes. Added together, federal and state tax credits can knock as much as half off the price of your system. That’s a huge savings.
This article lists all of the federal and state tax credits that are currently available.
What is the difference between a tax credit and other solar rebates?
There are different types of financial incentives to install solar. There are upfront rebates, like New York’s NY-Sun program that reduces the price you pay up front. Other states have renewable energy credits you can earn for every megawatt-hour of solar electricity you generate.
In the case of income tax credits, they reduce the tax liability you owe. There are a couple important points to keep in mind:
- A tax credit isn’t a direct rebate, but is used to reduce the taxes you owe.
- You have to wait until tax time to take advantage of the credit.
The important thing to know about the first point is that a tax credit might be more than the taxes you owe, in which case the credit can potentially be wasted. For example, let’s say that your solar installation earns you a tax credit of $5,000. If your federal tax bill is only $4,000, this means that the remaining $1,000 credit will go unused that year.
Federal income tax credit for solar
The big solar incentive in the United States is the federal tax credit, sometimes referred to as the Solar ITC (investment tax credit). Technically, it’s only known as the ITC for business tax credits. For homeowners, it’s known as the Residential Energy Credit.
It’s currently worth 30% of the total system costs, including labor. For example, if the invoice price of your system is $20,000, you’ll receive a federal tax credit of $6,000.
Because it will result in a large tax credit, you might not be able to use it all in one year. Fortunately, the federal credit can be carried over to the next year, giving you another chance to spend it. The carryover only works for one year, however. This means that if you have very low federal tax liability - maybe you’re a retiree for example - you might not be able to recoup all of your credits. That’s an important point to keep in mind.
For more details including links to the relevant tax forms, check out our article on the solar ITC.
Arizona Residential Solar and Wind Energy Systems Tax Credit
This program gives Arizona homeowners a 25% state tax credit on renewable energy systems up to a maximum credit of $1,000.
The tax credit applies to solar photovoltaic panels (ie. solar panels that generate electricity), passive solar, solar hot water systems, small wind turbines, and solar daylighting systems.
If you’re unable to use all of the tax credit in one year, Arizona allows you to carry forward any unused credits for up to 5 years.
Use Arizona tax form 310 to apply for the credit.
Hawaii Renewable Energy Technologies Income Tax Credit (RETITC)
Hawaii has a generous tax credit worth 35% of the total cost of a solar energy system. The credit applies to single family homes, multi-family properties, and commercial properties and can be used for both solar photovoltaic (ie. electricity) and solar hot water systems.
The credit is capped at $5,000 for single family homes, $350 per unit in a multi-family home, and $500,000 for commercial properties.
It also applies to wind turbines, in which case it’s worth 20% of the system cost, up to $1,500 for single family homes, $200 for multi-family homes, and $500,000 for commercial installations.
A potential credit of $5,000 might exceed your state tax liability. Fortunately, you can carryover any unused credit from as far back as 2009, giving you plenty of time to use it.
Use Form N-342 to apply for the credit. Visit tax.hawaii.gov to learn more.
Iowa Solar Energy Systems Tax Credit (expired)
Unfortunately, the Iowa state income tax credit for solar installations has expired as of 2022. Previously, the credit was calculated as 50% of the federal tax credit, which represented a significant savings for homeowners.
While the official expiration date was December 21, 2021, there is a backlog of applications and the Iowa Department of Revenue currently estimates that if your application was received after October 1, 2020, you may not receive your tax credit.
Massachusetts Renewable Energy Source Property
Massachusetts offers a straightforward tax credit worth 15% of the cost of your solar system, up to a maximum of $1,000. Most homeowners will receive the maximum, because 15% off a system that costs $6,667 is $1,000. The invoice price of most home solar systems will be at least double that.
The tax credit covers the use of renewable energy to generate hot water or electricity, which means that solar thermal, solar electric (ie. photovoltaic panels), and wind turbines is included. Notably, electric heat pumps are not.
To claim the credit, you need to complete Schedule EC and add a line item in Schedule CMS using the code “SLRWND” for the credit type.
Visit the Mass.gov page on residential property tax credits to learn more.
Montana Residential Alternative Energy System Tax Credit
Many different technologies qualify for Montana’s state income tax credit, which is worth up to $500 for an individual or $1,000 for a household filing together. These include solar photovoltaic, solar heating, wind, heat pumps, and even wood pellet stoves (if they are certified low-emission).
The credit is equal to the invoice price of the system, up to the $500 or $1,000 maximum. With any solar PV system you purchase, you can expect to claim the maximum amount.
To claim this credit, use Montana Form ENRG-B.
New York Residential Solar Tax Credit
The New York State Department of Taxation and Finance offers a generous tax credit for solar that is worth 25% of the system price, up to a maximum of $5,000. When combined with the federal tax credit, New Yorkers can go solar for roughly half the invoice price.
This tax credit is unique because it allows you to claim the credit even if you use a power purchase agreement or lease. With other tax credits, including the federal tax credit, the solar installer that sells the PPA or lease receives the tax credit, not the homeowner. In the case of a PPA or lease contract lasting at least 10 years, the homeowner is able to claim the amount they annually pay, up to an accumulated maximum of $5,000. This means that you track the amount you claim each year, and can keep claiming your payments every year until the total amount reaches the $5,000 limit.
Because of the large amount of tax credit you may receive under this program, there’s a good chance that you won’t be able to use it all in one year. No problem: you can carry over any unused credits for as many as five years, giving you plenty of time to take full advantage of the credit.
Eligible technologies include both solar photovoltaics and hot water. Use Form IT-255 (“Claim for Solar Energy System Equipment”) to file. Visit the NY Department of Taxation and Finance for the form and instructions.
South Carolina Solar Energy, Small Hydropower, and Geothermal Tax Credit
South Carolina might not be known as a hotbed for residential solar, but it has one of the best state tax credits for solar in the country. The SC Department of Revenue lets homeowners claim an income tax credit worth 25% of the cost of their solar photovoltaic or solar thermal systems, with no specified cap. This means that, when combined with the federal tax credit, you may end up paying only half the invoice price.
The main caveat with this credit is that you can claim a maximum of $3,500 per year or 50% of your tax liability that year, whichever is less. You have 10 years to claim the full credit.
Let’s say that you purchased a solar array for $20,000 before incentives. South Carolina will give you a 25% credit, which adds up to $5,000. If your South Carolina income tax liability that year is $4,000, you can claim 50% of that - or $2,000 - for your solar tax credit. The remaining $3,000 will roll over, and if your taxes are the same the next year, you will be able to claim $2,000. In the third year, you will able to claim the last $1,000 of your credit.
This is slightly complicated, but it’s a valuable program for homeowners who want to go solar. For instructions and to claim the credit, use Form TC38.
Are batteries eligible for tax credits too?
While some of these state tax credits allow you to claim credits for a wide range of renewable energy technologies including small wind and geothermal, unfortunately none of them system batteries like the Tesla Powerwall and Enphase Encharge are becoming popular, unfortunately none of the state tax credits allow you to claim the cost of solar battery storage.