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2023 Residential Solar Tax Credit Explained

Updated: Mar 11, 2023

Residential Solar Tax Credit Incentives

Undoubtedly, most residential properties are turning to solar as their primary energy source. Both federal and state governments have established tax credit incentives to motivate homeowners into adopting solar photovoltaic systems as their source of energy.

As a homeowner, you probably have many questions about these incentives. Well, this article gives you a detailed insight into the residential solar tax credit incentives for 2023 and how you can take maximum advantage of them.

Definition of Tax Credit

A tax credit reduces the income tax that you would owe to the federal or state government. For instance, a tax credit of $500 means that the same amount will reduce your federal or state income tax. A federal tax credit is also referred to as the Investment Tax Credit or ITCS.

What You Should Know About the Federal Solar Tax Credit

A federal solar tax credit is a tax incentive provided by the federal government. It is probably the most crucial incentive you can receive once you go solar. It currently stands at 26% and applies to business and residential solar systems installed between 1st January 2006 and 31st December 2023.

To be eligible for a federal solar tax credit, you must install the solar system during the tax year and generate electricity for a home in the United States. Other factors that define your eligibility for the tax credit include:

  1. You're using the solar for the first time.

  2. You own a solar photovoltaic system, meaning that you bought it through a financing program or with cash, and you are not planning to lease it or purchase electricity generated by another person.

According to the IRS, federal residential solar incentives apply to all expenses involved in your system. This includes:

  • The cost of buying solar PV panels and cells.

  • Contractor labor costs, including assembly, original installation, permit fees, and developer fees.

  • The cost of additional installation equipment like inverters, mounting equipment, and wiring.

  • Sales taxes on all eligible expenses.

How Other Incentives Can Affect Your Federal Solar Tax Credit

The federal solar tax incentive is probably the most preferred residential solar incentive that homeowners can utilize. However, state solar incentives can negatively or positively affect the amount you can save from the federal ITC. Below is a breakdown of how these incentives can affect your federal solar incentives.

Repayment from Electric Utility Solar Incentives

Under the federal solar tax credit, subsidies from utility companies for installing solar PV systems are excluded from your income tax. Therefore, the utility subsidies should be subtracted from your system installation cost before calculating your tax credit.

For instance, if the cost of installing your solar system amounted to $20,000 and your utility company made a one-time compensation of $1,000, you should calculate your federal credit incentive from $19,000.

Payments for Renewable Energy Certification

If a utility or buyer gives you cash incentives for renewable energy certification, the payment will still stand as taxable income. Therefore, this will increase your gross income but reduce your federal solar tax incentive.

Compensation from the State Government

State solar incentives do not reduce federal tax credit. Therefore, the federal tax credit will still apply to the total cost of installing the solar system, regardless of any rebate you might have received from your state.

Residential Solar Incentives in Massachusetts

Homeowners in Massachusetts can enjoy other residential solar incentives apart from the federal solar investment tax credit. Currently, Massachusetts sits eighth in the number of states adopting solar tax incentives. Below is a rundown of the residential solar incentives in Massachusetts that makes going solar much easier than you can imagine:

Renewable Energy Income Tax Credit

This state residential solar incentive exempts 15% of your state income tax for all purchased home solar systems. Homeowners can only enjoy up to $1,000 of state tax reduction through this program.

SMART (Solar Massachusetts Renewable Target) Program

This is a solar tax incentive that compensates homeowners per Kilowatt-hour (kWh) produced by their residential solar systems. Homeowners can enjoy incentives from this program if they are under the following three publicly held electric utilities in Massachusetts, including National Grid, Unitil, and Eversource. You can only receive a specific subsidy from this program based on the utility company you depend on.

Solar Installation Property Tax Exemption

This program exempts part of the property tax on added home value due to solar installation. Zillow claims that homes with solar installations sell at 4% more than those without PV solar panels.

Since your home's value increases your property tax, the state applies an exemption on the increased value for twenty years under this program.

How I Can Claim My Solar Tax Credit Incentives if I Meet All the Requirements

Assuming that your solar system qualifies for the solar tax credit, claiming your credit is quite easy. All you need to do is file out IRS Form 5695. You must calculate the total cost of your solar panel project, write the figure on the first line of the form and write the same number on line five if you are not claiming any other type of energy credit. You will then multiply the figure by 26% and write down the result on line six.

Once you've figured out how much your federal tax credit is worth, you should add the information on IRS Form 1040/Schedule 3. On line five on this schedule, write the same number you had written on the six of Form 5695.

And that's it. All you should do now is attach Form 5695 while filing your taxes.

Go Solar with the Best Solar Company in New England, MA

Going solar does not only help reduce the level of carbon emission but helps increase the value of your home. Nowadays, homebuyers prefer buying homes with solar systems due to their ability to cut down their energy cost. Therefore, if you're unsure whether installing solar PV would be beneficial, this should prove you wrong.

If you're looking for a trusted company to install the best solar system for your home in New England, MA, Devlin Energy is here to help. We are a family-owned solar company with over 56 years of experience. Contact us today for the most trusted solar solutions.

Image Source: Olivier Le Queinec / Shutterstock

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