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Amid rising electricity and home energy costs across the country, the Inflation Reduction Act makes installing solar panels and storage batteries a more attractive investment for many homeowners than it was even a couple years ago.
With the new legislation’s Residential Clean Energy Credit, you can subtract 30 percent of the cost of installing solar heating, electricity generation, and other solar home products from your federal taxes. The credit is a reboot of an older, less valuable federal tax credit and will be available to taxpayers for more than a decade. That means homeowners considering solar installations have plenty of time to consider their options.
Here are key details.
If you install solar energy equipment in your residence any time this year through the end of 2032, you are entitled to a nonrefundable credit off your federal income taxes, equal to 30 percent of eligible expenses. There’s no dollar limit on those expenses; you’re entitled to that 30 percent tax break whether you spend $20,000 or more than $100,000 on costs associated with a residential solar system.
CR explains how buying a heat pump for your home could get you thousands of dollars in federal tax credits and state rebates. We also fill you in on credits and rebates for electric cooking appliances and which cars will qualify for the new electric vehicle tax credit.
According to the Department of Energy and the new law’s language, the same expenses covered under the old law are eligible for this new solar tax credit:
In a change from the old law, eligible battery storage units that you install must store at least 3 kilowatts.
The credit lowers your federal taxes. So if you spend $24,000 on a system, you can subtract 30 percent of that, or $7,200, from your federal taxes. (You must take the credit for the year the installation is completed.) If, say, you would owe $7,000 in taxes before the credit, a $7,200 credit would drop what you owe to zero. You can’t get a tax refund for the $200 remainder, however. But you can carry forward that remainder into a later tax year.
You’ll save, too, in lower electricity bills. How much you’ll save depends on a number of factors, including how much electricity your household uses, the size of your solar system and the amount of sunlight it gets, and local electricity rates. Real estate experts say a purchased solar system—as opposed to a leased one—can raise the value of your home when you sell.
The 30 percent credit lasts until Dec. 31, 2032. It drops to 26 percent in 2033, then 22 percent in 2034, and disappears in 2035, unless Congress continues it. (The new law supersedes an older law, set to expire in 2024, that would have provided a 26 percent credit for solar installations this year, and 22 percent in 2023.)
It’s available to all taxpayers for their primary or secondary residence located in the U.S. Taxpayers of any income level can take advantage of it. You can use it whether you itemize your taxes or take the standard deduction.
Keep in mind, though, that the solar tax credit is available only if you purchase a solar system; if you lease one, you can’t take advantage of the credit. The same applies if you are a member of a power-purchasing cooperative. However, if you are a tenant-stakeholder in a co-op, you can claim credit for your proportion of the purchase. You can also claim credit for your proportion of the purchase of a community-owned solar system.
The new law doesn’t reduce your federal credit if your state also offers one. But it will be up to your state’s taxing authority whether your state credit is reduced if you take advantage of the federal one.
New York, for example, does not cut its solar incentives for people who take advantage of federal ones; state residents can credit 25 percent of qualified solar energy system equipment expenditures from their state taxes, up to $5,000. You don’t get a refund if that amount is more than what you’d owe, but you can carry over the difference for up to five years.
Yes. The new law also includes an improved Nonbusiness Energy Property Credit, which covers other qualifying efficiency upgrades, such as Energy Star certified exterior windows, Energy Star certified exterior doors, air-sealing insulation, upgraded electrical circuit panels, and heat pumps. You can claim both credits on your federal return—either in the same year or different years, depending on when the installations are completed.