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What is the Solar Tax Credit and Five Things You Can Use Them On

By Cristy Lynch and Edited by Tori Addison, with RitzWerks Additions

Solar panel sample picture

Solar energy helps protect our environment, reduce our carbon footprint, and lower greenhouse gas emissions. Plus, it can lower power bills by about $1,500 annually. Yet only 8% of U.S. households have installed solar panels at home. One reason is the price tag: the average cost of solar panels is more than $17,000, with many households spending as much as $25,000. What’s more, it can take more than eight years for the investment to pay off. Fortunately, there are programs designed to make solar more affordable. Many cities, states, utility companies, and even community organizations offer additional incentives and rebates to encourage renewable energy adoption. This guide will cover which programs are available, how to apply, and how to maximize your solar power investment.

What Are Solar Incentives and Rebates, and How Do They Work? Because cost can be a barrier to solar energy adoption, government agencies and utility companies across the U.S. offer three types of incentives: tax breaks, rebates, and performance-based payments.

  • Tax breaks: A tax break reduces your tax liability dollar-for-dollar. So a $1,000 tax credit would lower the amount of taxes you owe by $1,000 for that year. While this may not reduce the upfront cost of going solar, it will reduce your tax burden, sometimes for multiple years. You can also combine tax breaks with other incentives.

  • Rebates: These are cash-back programs offered by governments, manufacturers, and installers to lower the cost of purchasing and installing a new solar system.

  • Performance-based incentives: These incentives are exactly what the name implies, money paid in exchange for solar energy production.

The amount and availability of incentives depend on many factors, like your location, income, and the size of your solar system. To find specific programs and incentives available in your area, use the Database of State Incentives for Renewable Energy (DSIRE).

Solar Incentives and Rebates Offered in 2023 Fortunately, there are various programs available to homeowners interested in saving money on solar — before, after, and even on an ongoing basis. You can even combine many available incentives. Here are eight of the most popular solar incentives and rebates currently available. Federal Solar Tax Credit The federal solar tax credit, also known as the solar investment tax credit (ITC), incentivizes homeowners to purchase a solar power system by reducing the amount of federal taxes owed. Currently, you can claim 30% of your total solar PV system cost as a tax credit. Anyone who files federal taxes is eligible for this credit, and there is no maximum dollar amount. You can claim the federal tax credit once for the year you turn your solar power system on — not the year it was installed or purchased. Under the Inflation Reduction Act, the tax credit will decrease to 26% in 2033, then 22% in 2034, and phase out completely in 2035 unless renewed by Congress. Because the federal solar tax credit is not a tax exemption or tax refund, you will not receive a check in the mail if the credit is larger than your taxes owed. However, the remainder is applied to next year’s taxes and can roll over for up to five years. State Tax Credit In addition to the federal tax credit, many states offer their own solar tax credit to further reduce costs for homeowners. For example, South Carolina offers a tax credit worth 25% of the total cost of a solar system (including installation), and you can roll over any extra credits for up to 10 years. Performance-Based Incentives (PBIs) Rather than a one-time cash rebate, a performance-based incentive (PBI) pays homeowners for solar energy produced and sent to the electric grid over time. The PBI is based on fixed energy rates (kilowatt-hours) over a contracted period, and you can combine it with other incentives. One type of PBI is a feed-in tariff (FIT), which only a handful of states offer. These guarantee a payment higher than the grid’s market price for electricity over the length of a contract, typically 15 to 20 years. Solar Renewable Energy Certificates (SRECs) Another PBI is a Solar Renewable Energy Certificate (SREC), a tradable certificate or credit representing electricity generated from solar energy. Homeowners and businesses can earn and sell SRECs to bring in additional revenue on top of electricity savings. One megawatt-hour of electricity generated by a solar system produces one SREC, though market supply and demand determine the monetary value of SRECs. Utility companies purchase SRECs to meet renewable energy mandates, such as Renewable Portfolio Standards, which require a percentage of electricity produced from solar and other renewables. Currently, SRECs are only available in a few states. Utility Rebates A utility rebate is offered by electric utility companies to encourage homeowners to install solar panels or other solar energy technologies on their properties. Companies typically offer rebates as upfront incentives you can receive directly from your utility provider. Rebates can take various forms. They may provide a direct cash payment based on eligibility criteria, such as system size, installation requirements, or customer type. Alternatively, they may come with a per-watt or per-kilowatt-hour incentive, where the rebate amount is calculated based on the solar system’s energy output. To obtain a rebate, homeowners typically must apply and provide documentation to verify their solar installation. The availability and amount of utility rebates can vary depending on the utility company and location. Tax Exemptions Homeowners who install a solar system may also be eligible for property and sales tax exemptions. Specific tax exemptions and incentives vary by state. Property Tax Exemption With a property tax exemption, homeowners or businesses with solar panels do not have to pay additional property taxes based on their increased property value after installing solar. This exemption ensures your property tax burden remains unaffected by the presence of a solar power system, and is available in 36 states. Sales Tax Exemption A solar sales tax exemption eliminates or reduces sales tax when you purchase solar energy equipment. The exemption can include solar panels, inverters, mounting racks, and other equipment and may also apply to labor and installation costs. Currently, 25 states offer sales tax exemptions. Net Energy Metering Net energy metering (often called “net metering”) allows solar panel owners to receive billing credits for extra electricity generated and sent back to the grid. When solar panels produce more electricity than you can use, the excess gets sent back to the grid, spinning the electric meter backward and earning credits. These credits can offset grid consumption when solar panels are not generating enough energy, such as at night or on cloudy days. Grants and Subsidized Loans Some homeowners may be eligible for grants or low-cost loans to help with the costs of purchasing and installing solar energy. Grants are basically “free money” awarded based on specified criteria (like income limits or property requirements). Subsidized loans are typically provided as a subsidy or incentive and feature lower interest rates with favorable repayment terms, such as longer repayment periods, smaller monthly payments, or deferred payment options. This type of loan gives borrowers greater financial flexibility and can help make an investment in solar energy more manageable. The following government agencies offer financial assistance to help homeowners install solar systems and achieve lower energy costs:

  • U.S. Department of Energy

  • U.S. Department of Health and Human Services

  • U.S. Department of Housing and Urban Development

  • U.S. Department of Treasury

  • U.S. Department of Agriculture

  • U.S. Department of Transportation

How To Apply for Rebates and Credits In most cases, your solar energy installer will take care of available rebate and tax credit applications for you. Regardless, it’s always good to be informed about the process. Most programs provide clear instructions and application forms online. For example, to claim the federal solar tax credit, you must file IRS Form 5695 along with your return. You may want to consult with a tax professional for guidance on your specific financial situation. Take the time to carefully read through the guidelines and requirements to ensure you submit a complete and accurate application. Remember to keep copies of your application and any correspondence for your records.

Strategies for Getting the Most Out of Solar Incentives and Rebates Applying for rebates and credits can significantly reduce the cost of solar installations and encourage renewable energy adoption. Here are strategies to help you get the most out of solar incentive programs. Research Your Options Start by exploring the incentives provided by your state and local government. Many regions have unique programs aimed at promoting renewable energy. Additionally, utilities and solar equipment manufacturers often offer additional incentives. Use the DSIRE database and filter accordingly. Understand Eligibility Criteria Different programs may have specific requirements related to the type of solar installation, equipment standards, and location. Familiarize yourself with the eligibility criteria to ensure your solar system meets all the necessary qualifications. This knowledge will enable you to make informed decisions when selecting solar equipment and working with installers. Work with a Reputable Installer Experienced installers are well-versed in the requirements of various programs and can guide you through the solar process, ensuring compliance with all necessary regulations. Your provider will ensure correct solar system installation, including the necessary permits, so you can submit accurate documentation to receive any incentive benefits and rebates available to you. Keep Records and Receipts Save and organize all paperwork (such as receipts, invoices, and proof of installation) to help streamline the application process. Keeping thorough records can help you prepare to provide the necessary documentation when submitting your application, reducing potential delays and ensuring a smoother overall experience.

Five Things You Can Use The Solar Tax Credit On

-Solar Arrays (roof-mounted solar panels)

-Solar Storage

-Solar Heaters

-Solar-powered battery backup

Our Conclusion Researching your options, understanding eligibility criteria, working with a reputable installer, and keeping organized records can help you maximize solar energy incentives and rebates. Taking advantage of incentives not only reduces your cost of going solar but also helps promote sustainable energy practices to build a greener future. For more information on solar products go to

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