Earlier this summer, the Inflation Reduction Act passed. That’s good news for homeowners who are looking to save more by claiming solar tax credits when they invest in solar.
But what exactly did the Inflation Reduction Act change about the Solar Investment Credit, and what do homeowners need to know before they go solar?
As with anything tax related, the subject is complex. So we have an easy and quick read that goes over the most important aspects of how the IRA can help homeowners save, and what to know about claiming solar tax credits.
What is the Inflation Reduction Act
Officially passed by Congress in mid August of 2022, the Inflation Reduction Act is a lengthy 700 pages, crammed full of all sorts of details.
The bill included everything from making medicare work better for seniors, enticing companies to invest in American manufacturing, to helping everyday homeowners save on their energy and heating bills.
That last bit is where solar fits into the bill. While there has been a tax credit in place to help homeowners recoup around a quarter of their investment in solar, the original tax credit was about to drop and then expire. So while homeowners in 2021 and 2022 were able to recoup 26% of their solar costs, by 2023 that number fell to 22%, and then would disappear.
But once the IRA passed, that credit was increased and extended. Homeowners who go solar from now until 2032 can recoup 30% of their investment costs! Best of all, the credit applies to solar installed in 2022 even before the bill became law.
So now, if a homeowner goes solar with a system that costs $32,000 for instance, they can save $9,600!
How to Claim the Solar Tax Credit
Solar is usually the second largest investment a homeowner will make after buying their home. So it makes sense to try and save as much as possible.
Claiming the solar tax credit on your investment is a great way to help make the most of going solar. But a solar tax credit is a little different than some of the upfront discounts the Inflation Reduction act put in place.
That’s because, as the name suggests, the tax credit is something you need to claim on your taxes.
Because of that, you need to have a certain amount of tax liability in order to see the most benefit from claiming the tax credit.
Let’s look at how two different homeowners might be affected by going solar and claiming the tax credit.
Neighbors Ben and Bobbie
Ben and Bobbie live next to each other, and each own their homes. They both have roofs that are a great fit for solar: in good condition, lots of south and west facing exposure, and minimal shading from surrounding trees and structures.
Ben is retired, while Bobbie still works full time. Ben is already claiming social security and has no taxable income, while Bobbie makes $52,000 annually and has a tax liability of roughly $2,700 in 2022. Otherwise, Ben and Bobbie’s financial circumstances are identical as they’re both married, and no longer have kids living at home.
Ben, unfortunately, can’t claim a tax credit since his income is too low to have tax liability because he doesn’t have any taxes to pay. Bobbie, however, can claim a tax credit.
Claiming the Solar Tax Credit: What to Have on Hand
Once you’ve gone solar, you might have a few months before it’s tax season and time to claim that credit. But that doesn’t mean you can’t get the necessary documents together now, and save yourself some time later.
In order to claim the Solar Investment Tax Credit, you’ll need the following:
• Form 5695 from the IRS
• Schedule 3 (part of form 1040)
• Your contract from your solar installation (to find your gross solar installation costs)
Once you have those items, you can either do your taxes yourself per usual, or take the forms and documents with you to your tax professional.
The only other thing to keep in mind is that depending on your tax liability, you might need to carry the credit forward and claim it across several tax years. With 10 years to claim the tax credit, the sooner you go solar, the more time you’ll have to make sure you can claim the full amount you’re owed.
Invest in Solar and Save
Solar is a smart investment to make for homeowners looking to save money by avoiding rising energy costs, and claim tax credits along the way.
You can make sure you get the most out of your investment and have energy independence for years to come with professional solar from Purelight Power.
We design every system to meet your specific energy needs so you can go solar with $0 upfront.