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Solar Tax Credit by State in 2023: What You Need to Know

Is Solar a Good Investment in 2023?

Solar panel installation is a costly investment and some people may not be able to afford it in cash. The average cost of solar panels is $16,000. However, it also gives immense savings in long term. In addition, there are many rebates and tax credits for homeowners to encourage them to go solar. By implementing a qualified system, there are federal, state, and regional incentives that you may be eligible for.

What is a Tax Credit?

Tax credits are an effective instrument that can lower your taxable income and significantly lower your yearly tax burden. A tax credit can lower the amount of tax you owe or boost your tax refund by reducing your income tax liability dollar for dollar. Also, they differ from exemptions and deductions.

What Is Federal Solar Tax Credit?

The purpose of the Federal Solar Tax Credit is to lower your tax. You will get a credit for your tax if you install the solar system. The solar Investment Tax Credit (ITC) was established by the federal government in 2006. Since then, the U.S. solar business has increased by more than 10,000%, on average, every year during the past ten years. The sector has pumped billions of dollars into the US economy and produced hundreds of thousands of employees.

How Does the Federal Solar Tax Credit Work?

You are qualified for a Federal Solar Tax Credit, which you can claim on your federal income taxes for a portion of the cost of the solar system if you acquire a solar photovoltaic (PV) system during the tax year.

The ITC offered a 26% tax credit in 2021 for systems installed between 2020 and 2022. For systems implemented in the tax years 2022 through 2032, the ITC will now offer 30%. So, consider 26% to 30% savings while determining whether to install solar panels. Something to keep in mind is that you can only use the credit once. Your credit will carry over to the following year if the amount of taxes you owe that year is less than the credit you received. Be aware that the credit is a reduction rather than a refund.

Solar Tax Credit by State in 2023: What You Need to Know

What Does the Federal Solar Tax Credit Cover?

The following expenses are eligible for a 30% federal tax credit in 2022 if you are a homeowner who just set up a solar panel installation.

  • Cost of Solar Panels.
  • Cost of solar equipment such as solar inverters, wires, and mounting hardware.
  • Fees of permitting and inspection and installation cost of the solar system.
  • Cost of solar storage system such as batteries. Remember, the power capacity of the battery should be at least 3 kWh.

Sales taxes are paid on allowable costs related to solar installation (though some states waive sales tax on PV system equipment).

Federal Solar Tax Credit Eligibility:

If your solar system is brand-new or is being utilized for the first time between January 1, 2006, and December 31, 2023, you may be eligible for the ITC. The ITC will expire in 2024 if Congress doesn’t extend it. Other requirements are detailed below:

  • You should be the owner of your solar system (Not on Lease).
  • The physical location of the solar system must be within the United States.
  • You must use the system for an off-site community solar project or at your primary or secondary residence in the United States.

Solar Energy System Eligibility:

Installing a solar energy system, such as solar water heaters or a solar photovoltaic (PV) system, that generates electricity for a home qualifies you for the federal solar tax credit. Both solar water heaters and solar photovoltaic (PV) systems are eligible for the federal solar tax credit since they use the sun’s energy to heat water and turn light energy from the sun into electricity.

What is Solar Water Heater?

The most affordable method to heat the water in your house is using a solar water heater. Solar water heaters use the sun’s thermal energy to warm the water in your house. They come in a variety of designs that include a solar collector and storage tank.

What are Solar Panels (Photovoltaic Systems)?

Solar panels, sometimes referred to as photovoltaic (PV) panels, are flat structures that resemble panels and turn solar energy in the form of energy particles called photons into electricity. Solar panels, which come in three varieties including monocrystalline, polycrystalline, and thin-film, can considerably lower your power cost.

How to Claim Solar Tax Credit?

After installing solar energy, you may only use the tax credit once. To give the necessary papers and instructions, which include the following, you should talk with your solar supplier. Further are the steps to follow to claim the solar tax credit:

  • Submit IRS Form 5695 with your tax return.
  • Calculate the tax form’s credit in Part I.
  • Submit the “qualified solar electric property charges” form with your solar system.
  • On line 1, put the entire costs of your project as specified in your solar contract.
  • Finish up the math on lines 6a and 6b.
  • Use the Home Energy Efficient Property Credit Limit Worksheet provided by the IRS to determine any tax obligation restrictions on line 14
  • On lines 15 and 16, finish the math.
  • Enter the precise number from line 15 of your Schedule 3 on line 5 (Form 1040).

Any unused portion of your tax credit that you were unable to claim in a single tax year may also be carried over.

Solar Tax Credit by State in 2023: What You Need to Know

How Do Other Incentives Affect the Federal Solar Tax Credit?

Customers that use solar energy can benefit from incentives to lower the overall installation costs of their system, including electric utility rebates, renewable energy certificates, and state government rebates and tax credits. The amount you report on your tax return to the IRS as a result of these reductions will change.

State Solar Incentives:

In addition to the federal ITC, several states and Puerto Rico provide solar incentives to entice homes to install solar. Although each state has its incentives, tax credits, rebates, and renewable energy certificates are a few that are widely used. California, Texas, Minnesota, and New York are states with a lot of solar subsidies. The solar incentives offered by each state differ greatly from one another. Several organizations provide various financial incentives for solar power.

State Tax Credits:

Similar to how the federal ITC operates, state tax credits apply to your state taxes. State-by-state differences in exact amounts are substantial, and they often do not affect your federal tax credits.

State Government Rebates:

When it comes to your state taxes, state tax credits operate similarly to the federal ITC. The precise figures differ greatly from state to state and often do not lower your federal tax benefits.

Solar Renewable Energy Certificate:

Another sort of state-level solar incentive is a Solar Renewable Energy Certificate (SREC), sometimes known as a Solar Renewable Energy Credit. When you build your solar power system and register it with the relevant state agencies, they will monitor the energy output of your system and sporadically provide you with SRECs as a perk. You can sell your SREC to a buyer who will give you money that is normally regarded as taxable income, such as your local energy company.

Other Incentives

Besides the above monetary benefits, the following are some additional benefits for homeowners installing solar energy systems:

Local Utility Rebates:

The installation of solar power systems by local homes is frequently aided by financial incentives offered by the local utilities. Some companies provide one-time subsidies to establish a solar power system, while others offer refunds on energy bills depending on how much energy the system generates. PBIs, or performance-based incentives, are rewards that give you credit for each kilowatt-hour of power your system generates.

Subsidized Loans:

You might be able to get subsidized loans from your state, a local utility, or another non-governmental group to pay for your solar panel installation. Discuss your choices for subsidized financing with a local installer before you buy your system; they are likely to be familiar with any local solar programs.

Tax Exemptions:

After installing a solar system, you can be qualified for other tax exemptions in addition to tax credits. Although these systems will raise the value of your land, some states and municipalities do not consider them when determining property taxes, so installing solar won’t result in a higher property tax payment.

When it comes time to install your system, you might save hundreds of dollars thanks to programs in some jurisdictions that guarantee that all purchases of solar power system components are free from state sales taxes.


Using a combination of these different solar tax credits and other financial advantages will help you save money on the cost of installing a solar power system. Even though installing one cost a lot of money upfront, these programs will significantly lower the system’s eventual cost. This is the right time to take the right decision and invest in the most returning investment.

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