Federal Solar Investment Tax Credits – All You Need to Know in 2021!

Federal tax credits for the installation of solar power equipment remain in effect, and there is significant money to be saved.

This guide to the Federal solar investment tax credits gives you what, how, and how much can be saved when you install solar electric panels or BiPV solar tiles aka solar photovoltaics or a solar hot water system on your residence. Saving money at tax time has never been easier – and this is a very good time to consider going solar.

What is the Federal Solar Investment Tax Credit?

Since Congress passed the Energy Policy Act of 2005, the Residential Renewable Energy Tax Credit has allowed homeowners to deduct a percentage of the installed cost of a solar PV system for their home. It was originally set to expire after 2007 but has since been extended several times. The current expiration date is December 31, 2023. Will it be extended again? Probably, but it’s a risk to wait.


Did you know? The IRS also calls this the Investment Credit because it is an investment that has monetary returns, meaning that your upfront expense of a solar PV system will be recouped reasonably quickly, and you’ll save money over the life of the system.

Here is the IRS Publication about Form 5695, the Residential Energy Credits, with more details. And here is the IRS Form 5695 to peruse.

How It Works – A Credit, Not a Deduction

Once you have your solar energy system installed, you are eligible for the solar investment tax credit. This credit is deducted “off the top” of whatever federal income tax you owe that year rather than merely reducing your taxable income, as a deduction would.

And, if you don’t have enough tax liability to claim the entire credit in one year, you can “roll over” whatever remains into future years.

How Much Can I Save?

Through the end of 2022, homeowners installing a new residential solar PV system can deduct 26% of the cost of the system from their taxes. In 2023, this tax credit will be reduced to 22%.

Here is an example:

If you were to spend $10,000 on the installed cost of a solar PV system before December 31, 2022, you could subtract $2,600 from your total tax liability for that year. If you were to wait until 2023 to install the same system, your solar tax credit would be reduced to $2,200.

As noted, Congress may extend the credit again, and most experts guess it will, but at this time, it is due to expire at the end of 2023.

Is the Credit Only for the Cost of the PV Panels?

No. In addition to the initial cost of the actual PV solar panels for your system, there are additional costs that are included in this tax credit:

  • Contractor labor costs for onsite preparation, assembly and original installation, including building permits, inspection costs, and other related fees.
  • All system-related equipment, including wiring, inverters, and mounting equipment.
  • Energy storage devices (batteries) that are charged exclusively by the associated solar PV panels.
  • Sales taxes on all eligible expenses.

Did you know? There is no maximum amount that can be claimed.

Some states also allow a tax credit that can be applied to your state income tax liability. They are not generally as liberal as the federal credit but will help lower your state taxes as well. These credits can be searched at DsireUSA.org, a database of credits and rebates for renewable energy and energy efficient equipment.

The Federal Solar Tax Credit Applies Broadly

All these circumstances are eligible:

  • You financed the purchase price of the solar PV system. The full purchase price, plus sales tax may be included, but not the interest, fees, warranty programs, etc.
  • You are not connected to the grid. Your solar PV system does not have to be connected to the electric grid for you to claim the residential federal solar tax credit, but it must be generating electricity for use at your residence to qualify.
  • Here’s an interesting one, though probably a rare case: You have purchased a house for your residence that had a solar PV system already installed. If the builder or previous owner did not already claim the ITC, you may do so in the year you move in.
  • You have installed a solar PV system on a vacation home if it is in the United States. Note, however, that the ITC for a vacation home would only apply partially, reflecting the amount of time or the number of months you spend at the vacation property per year.
  • Your solar PV panels are not on your roof, where we typically think of them being installed. As long as they are located on your property and are generating electricity for your home, they are eligible for the credit.

What Are Some of the Limitations?

  1. The solar PV system must be fully installed and operational before the ITC can be applied.
  2. Solar photovoltaic systems installed on rental properties are not eligible for the solar tax credit.
  3. The solar energy system must be new or being used for the first time. The credit cannot be claimed on solar equipment that has been used in a prior installation.
  4. You must own the solar PV system and associated equipment. The tax credit cannot be claimed if you are leasing or are in an arrangement to purchase electricity generated by a system that you do not own.

How Will Solar PV Lower My Energy Bills in the Future?

You will start saving money on your energy bill the first month your solar PV system is in operation. Estimates vary depending on your climate and weather conditions, but homeowners typically experience at least a 40% reduction in their monthly electric utility bill. If you finance the cost of your solar PV system, the monthly savings will help offset the financing costs.

Because the solar panels that generate electricity are connected to your electrical wiring, your house will use this electricity first before sending it off the electrical grid.

If your home is already off grid, then you’ll save 100% of your energy costs as long as you aren’t firing up a gas generator at night or on cloudy days.

Finally, solar PV systems can have an optional “home energy storage battery” that will be compatible with your solar panel system. Excess electricity produced by the PV system gets sent first into the battery for storage, so the excess energy is available for use at night and/or in the event of an emergency.

Pro Tip: There is potential value in being connected to the grid. It requires net metering, aka NEM or net energy metering. If your system generates more energy than you use, the excess is pushed onto the grid and stored there in exchange for credits from the utility. EnergySage offers a clear explanation of how this works.

Bottom Line

There has probably never been a better time to consider installing a solar PV system on your home. If installed in 2021 or 2022 it will qualify you for a 26% solar tax credit – taken right off the top of your federal income tax liability. In 2023, it will still qualify for a 22% tax federal credit. State tax credits may also apply.

With an expected lifespan of 20-30 years and a typical average payback period of about 8 years, your solar PV system will certainly more than pay for itself as well as being an attraction for any future buyers should you decide to sell your home.


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