What Does the Residential Clean Energy Credit Mean for You and Solar Energy?September 2, 2022
The Biden Administration recently signed and passed the Inflation Reduction Act, a law that addresses many components of the current economy, intended to “lower costs for families, create good-paying jobs for workers, and grow the economy from the bottom up and the middle out.”
This is good news for solar energy because the administration included in the act the “Residential Clean Energy Credit.” This credit allows some residential homeowners with solar systems installed to gain a 30% tax credit on their 2022 taxes.
What is a Tax Credit?
Tax credits can be hard to understand as there are several caveats surrounding them. They are different from tax deductibles, which you may be more familiar with. Whereas deductibles are able to somewhat reduce money owed, tax credits reduce what you owe on a dollar for dollar exchange rate.
For example, if you owe $1000 on your taxes, but claim a credit for something equaling $1000 for education or another eligible credit, that credit cancels out what you owe to now equal $0.
There are three main types of tax credits- refundable, non-refundable, and partially refundable. A refundable or partially refundable tax credit would indicate that in some circumstances, you may be compensated for credits that you claim in the form of a check. Non-refundable credits, however, only allow the amount of money you owe on taxes to be reduced to $0, with no further compensation. Although the solar tax credit is non-refundable, it is considered a federal Investment Tax Credit (ITC), meaning that it was implemented to incentivize the use of solar power and energy through the benefit of financial gain.
What Does the Solar Tax Credit Consist of?
With the passing of the Inflation Reduction Act, the claimable credit for investing in solar energy was raised from 26% to 30%. Technically under a new name, the credit was originally known as the Residential Energy Efficient Property Credit. The change allows not only an increase in the reward reaped from investing in solar energy, but also extends it, as the original credit was set to expire in 2024. Now the credit will stay at 30% until 2032, where it will then decrease to 26% in 2033 and 22% in 2034, expiring after 2024.
The 30% figure refers to the price percentage of the cost of your solar system and installation. For example, if you spent $20,000 on your solar system, your 30% tax credit would allow you to reduce the amount of money you owe on your taxes by $6,000 (30% of $20,000). In order to comply with the surrounding regulations, you take credit for the year the installation is completed, but technically any remaining credit balance can be taken into the subsequent years until extinguished.
Am I Eligible?
Just as with any other tax criteria, there are many specifics and caveats that must be met to ensure you meet the requirements. The Department of Energy released a comprehensive guide for homeowners to understand where and how they fit into the tax credit. There are some basic criteria which must be met which includes:
- Your solar PV system installation date was between January 1, 2006 and December 31, 2023.
- The system is located at your primary or secondary residence in the United States, or offsite at a community solar project.
- You own the system outright. The credit does not apply to those who lease or rent a system.
- The solar PV system is new and being used for the first time, the credit can only be claimed on the original installation of the equipment.’
What Costs are Included?
The general term of “solar system” is a bit vague, to get more specific the credit denotes the following costs as claimable.
- Solar panel costs.
- Costs of all additional electrical hardware and mounting hardware.
- Costs of permits, inspections, and fees.
- All installation labor.
- All battery hardware and installation costs provided they are charged by the solar system.
- Any applicable sales taxes on eligible costs.
The preservation and improvement of this tax credit is incredibly important for the incentivization of clean energy in the United States. Reaping financial reward has always been a part of what makes solar energy so great and this increased tax credit just adds to the list of reasons why investing in clean energy has benefits for both your wallet and the planet. Contact BlueSel today and get an instant and personal estimate on your new solar system.