Tax credit for solar energy plays a very important role in making renewable energy affordable and a popular choice among people. By decreasing installation costs, it encourages millions of people to install solar panels and switch to clean energy. Due to the solar energy tax credit, people not only switched to solar adoption but also extended their support towards environmental sustainability as well as economic growth in the clean energy sector.
Understanding Solar Energy Tax Credit
Solar energy tax credits are the incentives offered by the government to decrease the taxpayer’s income tax liability for switching to solar energy. For residential people, the main incentive is the Residential Clean Energy Credit, whereas businesses can follow the Investment Tax Credit (ITC).
The Solar Investment Tax Credit (ITC) is considered to be a tax credit program that encourages people to switch to solar energy and battery storage. The ITC offers financial incentives to both residential people as well as business owners. Such a tax credit helps to reduce up to 30% of the installation cost from the federal income taxes. This is because the ITC pays a percentage of the system cost. According to Enact Solar, after President Joe Biden signed the Inflation Reduction Act of 2022, the tax credit is offering up to 30% of installation costs between 2022 to 2032. However, the installation charge will decrease to 26% from 2033 and then be reduced to 22% in 2034. After all these incentives, these incentives will expire in 2035 without congressional renewal.
Solar Energy Tax Credit Facts
A few of the fun facts related to the solar tax credit are as follows:
- Right now, the United States has two federal tax incentives for solar panel installation are The Residential Energy Credit, officially confirmed by President Jimmy Carter in 1978, and the Residential Energy Efficient Property Credit established by President George W. Bush in 2005.
- The Residential Energy Efficient Property Credit of 2005 remained the same as it is today, but it has been revised 9 times. Thus, this tax credit works a little differently than it did back in 2005.
- The expiry date of this tax credit has been extended five times in the last 2 decades.
- The home solar tax credit has never referred to this tax credit as the Investment Tax Credit (ITC). This is commonly called as commercial version of the credit.
Solar Tax Credit Timeline
The timeline of solar tax credits is as follows:
1. 1978: Residential Energy Credit for Solar Thermal Systems
President Carter first passed the Energy Tax Act, 1987, creating the first iteration of a federal tax credit for solar installation in the U.S. He named it the Residential Energy Credit, which provided homeowners with tax credits. Furthermore, it was mainly provided to the people who invested in energy conservation or renewable energy upgrades. So, the following tax credits people earned are:
- 30% of the first $2,000 of the installation expenses.
- 20% of the next $8,000 of the installation expenses.
2. 1980: Residential Energy Credit Increased to 40%
In 1980, the Residential Energy Credit for solar panel installation was updated along with the Crude Oil Windfall Profit Tax Act. This act was signed by President Carter, and it aimed to recover the federal revenue from domestic oil production. It also included a few changes to the Residential Energy Credit.
Furthermore, the new changes in the incentives included more information about both the solar photovoltaic system and solar thermal systems. The most notable fact in this act was that the credit value increased to 40%. Thus, one solar panel can now earn a tax credit equal to 40% of its price, if the system cost doesn’t increase by more than $10,000.
3. 1985: Residential Energy Credit Expires
The energy crisis was reduced by 1985, and the cost of oil and gas returned to its actual price, which was before 1978. So, at the same time, President Ronald Reagan took his first initiative towards renewable energy, and decreased funds related to solar research. In 1986, he even removed the solar panel act from the White House.
4. 2005: The Energy Policy Act Produced a New Solar Tax Credit
President George W. Bush wanted to decrease dependence on Foreign oil and stabilize the energy security of America. So, he signed the Energy Policy Act of 2005 and introduced the Residential Energy Efficiency Property Tax Credit. This act was considered the modern version of the national solar tax credit. The new incentive offered people a new tax credit equal to 30% of the system cost, up to $2,000, and it was set to expire in 2007.
5. 2006: Expiration Date Increased by 1 Year
To improve the economy, President Bush passed another act called the Tax Relief and Health Care Act of 2006. This act extended the energy tax credit, along with the Residential Energy Efficient Tax Credit, to meet the goals of President Bush of decreasing reliance on Foreign oil. This act was supposed to expire on December 31, 2007, but later the date was extended to December 31, 2008.
6. 2008: Bank Bailout Bills Extended Credit, Removed Incentive Cap
The Emergency Economic Stabilization Act of 2008, under President Bush, bailed out Wall Street during the Great Recession. However, this included essential energy provisions such as an 8-year extension of the home solar tax credit. This said that the solar tax credit is only available for homeowners till December 31, 2016. Additionally, it omitted the $2,000 limit, making it one of the better incentives for every homeowner willing to invest in renewable energy.
7. 2015: Creating a Step-Down Schedule, Expiration Dates Pushed Again
Once again, the residential tax credit got extended with the help of a consolidated appropriations bill signed by President Barack Obama. The date expansion wasn’t the only thing that was changed, but it added a step-down schedule to phase out the credit for the next 6 years. The schedule includes:
- 30% for installations after December 31, 2016, and before January 1, 2020
- 26% for installations after December 31, 2019, and before January 1, 2021
- 22% for installations after December 31, 2020, and before January 1, 2022
- 0% for installations after December 31, 2021
8. 2020: Tax Credit Value Decreased by 26%
The tax credit reached its first step of the phase-down in 2020, and it was decreased from 30% to 26%. However, despite all these decreases, the savings gained from the incentives were good. After that, it got more 2 years of expansion. The bill then included COVID-19 relief provisions as well as an omnibus spending bill to stop the government shutdown. So, after President Donald Trump signed the Consolidated Appropriation Act, 2021, a few amendments were made to the tax credit, such as
- 26% for installation after December 31, 2019, and before January 1, 2023
- 22% for installation after December 31, 2022, and before January 1, 2024
- 0% for installation after December 31, 2023
9. 2022: Inflation Reduction Act Extended Tax Credit Until 2035
After the historic act signed by President Joe Biden, the home solar tax credit’s expiry date not only got extended until 2035, but it also got expanded to 30% until 2032. So, the step-down period includes:
- In 2033, it will decrease to 26%
- In 2034, it will decrease to 22%
- In 2035, it will expire completely
10. 2025: Solar Tax Credit Staying as an Integral Part of the Solar Industry
Over the last 2 decades, the solar tax credit has produced millions of dollars in growth in the solar industry. It also helped the U.S. build more than 5 million solar installations internationally. Furthermore, the Investment Tax Credit (ITC), the residential version of the residential energy credit, contributed significantly to the expansion of the solar industry.
Conclusion
The solar energy tax credit plays a very important role in promoting renewable energy adoption, decreasing cost, as well as encouraging a greener environment. The solar tax policies kept evolving over the years, driving massive growth in the solar panel installation all over the U.S., allowing homeowners to save money. This also helped them contribute to a cleaner and greener future.