Over the past decade, solar energy has gained popularity in the United States. It’s a great way to lower your energy costs, while providing clean, renewable energy. However, installing the systems can be expensive—running between $15,000 and $20,000. That’s why the U.S. government, at the federal, state and local level, offers tax incentives to encourage Americans to consider utilizing solar energy.
What is the Federal Solar Tax Credit?
The federal government offers a solar energy tax credit, also known as the investment tax credit (ITC), for all residential customers throughout the country. You can claim a percentage of what you paid for your solar power system on your federal income tax. If you install a system between 2022 and 2032, you’ll get a 30% tax credit. The credit will decrease to 26% in 2033 and 22% in 2034. Unless the U.S. Congress renews it, the tax credit for solar powered systems will expire in 2035.
There are a few requirements in order to be eligible:
- The system has to be installed on a home you own in the United States.
- You must own the system—it cannot be leased.
- The credit can only be claimed on installation of the original equipment.
The federal solar tax credit covers the following items:
- Solar cells or panels.
- Labor cost for assembly, installation and onsite preparation. Those can include developer and permitting fees and inspection costs.
- Additional equipment such as inverters, mounting equipment and wiring.
- Energy storage devices with a capacity rating of three kilowatt-hours or more.
- Sales tax on the above eligible expenses.
To claim the credit, you must have the appropriate documentation from your installer and file IRS Form 5695.
Which States Have Solar Incentives?
In addition to the federal tax credit, several states offer incentives to residents who install solar. They vary widely by state, so it’s important to check with your particular state to find out what incentives are available to you. It will likely be one or a mixture of the following:
- State Tax Credits – Many states offer a credit similar to the ITC that is applied to your state taxes. How much the credit ends up being depends on the state you live in. Only about 10 states offer this credit.
- Sales Tax Exemption – Some states will eliminate the sales tax on the purchase of your solar system.
- Property Tax Exemption – Even though solar panel systems increase property value, some states will not raise your property tax because of the upgrade.
- Net Metering – Some states will give you credit on your utility bill for sending your unused solar energy back to the grid.
- State Government Rebates – Some states will issue rebates upfront for a limited time each year for the installation of solar-powered systems.
- Solar Renewable Energy Credits (SREC) – Some states will give you a credit for every 1000-kilowatt of hours of solar energy generated by your solar panel system. Utilities will buy the credits from you to meet their state regulations requiring them to generate electricity from a renewable energy source.
States With Solar Power Tax Incentives
Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Illinois, Iowa, Kansas, Louisiana, Maryland, Massachusetts, Mississippi, Missouri, Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Carolina, Ohio, Oklahoma, Rhode Island, South Carolina, Tennessee, Texas, Vermont, Virginia, Washington, DC, West Virginia, Wisconsin
What States Have Net Metering?
Since solar power allows you to produce your own energy, you can eventually save money on your electricity bills. Where you may see the most immediate savings is through net metering. Most solar-powered systems are tied to your local electrical grid. The energy your solar panels produce are first used to power your home. Since solar panels can’t store the energy, the excess that isn’t being used is sent back to the grid.
States with net metering policies will actually pay you—in the form of credit on your electric bill—for the solar electricity you send back to the grid.
States With Mandatory Net Metering
Alaska, Arkansas, California, Colorado, Connecticut, Delaware, District of Columbia, Florida, Illinois, Iowa, Kansas, Kentucky, Louisiana, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Montana, Nebraska, New Hampshire, New Jersey, New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin, Wyoming
States With Compensation Other Than Net Metering
Arizona, Georgia, Hawaii, Indiana, Maine, Mississippi, Nevada
States With Voluntary Net Metering
States Without Net Metering
Alabama, South Dakota, Tennessee
Some states offer other alternatives to net metering. While they do credit customers for the energy they send back to the grid, the payment or reimbursement formula may be different.
What Are the Best States for Solar Savings?
Regardless of what state you live in, you are entitled to the Federal Solar Tax Credit. But since every state has different incentives, some places are more beneficial than others. These are the best states for solar savings:
California offers net metering, property tax exemptions and directing your property taxes to go for solar and energy efficient projects. The state also has a program for those who qualify for low-income housing to offset the cost of installing solar power. There are limited rebates given out at the city level all across California that you can apply for.
In New York, residents who go solar can claim a dollars-per-watt cash rebate for their systems. You can also deduct 25% or up to $5,000 on state taxes, have your sales tax waived on solar equipment, and participate in the net metering program.
Rhode Island encourages the use of solar power by giving homeowners a rebate of 85 cents per watt (capped at $7000), granting a property and state sales tax exemption, as well as allowing residents to participate in the net metering program.
In Connecticut, residents can sell solar power back to utility companies, apply for low-interest loans from the state government to install solar panels, and be exempt from paying state sales and property tax for solar power installation.
The state of Maryland has a clean energy rebate program where you can get $1000 to go towards installation. It also offers a property and state sales tax exemption, as well as a net metering program. Residents can also get a renewable energy certificate for each megawatt-hour of clean energy their solar panels produce and sell those credits.
Homeowners in New Mexico can receive up to $6000 to help pay for solar energy expenses. You can participate in the net metering program and receive a property tax exemption. The state also has a sustainable building credit up to $6.50 a square foot on your state income tax.
You can receive rebates on the local level from major utility companies in Colorado. Homeowners can also receive a property and state sales tax exemption and participate in a net metering program. The state allows residents who don’t own their home to receive their energy from an off-site solar array.
Massachusetts will give you up to $1000 in credit for the cost of your solar panel system. It has a property and state sales tax exemption, as well as net metering. There’s also a statewide program that gives credits to residents who use solar power. You’ll receive a fixed rate-per-kilowatt-hour amount for 10 years.
If you want to find out what your state offers, it’s best to start with your local utility. They will know what’s available to you and what tax incentives are offered within your state, region or county.
Beware of Free Solar Scams
As you might expect, there are scams involving solar panel installation – so be aware. The Better Business Bureau (BBB) has actually issued a warning about these types of scams. It usually starts with someone contacting you by email, phone, social media, or in person and pretending to be a salesperson for a solar company. They’ll offer you low cost or free installation of solar panels, but tell you the deal is only available for a limited time so you have to act now.
They may be trying to scam you out of money or your personal information. Protect yourself by not making a rash decision. Take their information, if they’ll give it, and do your research. If you’re looking to install solar panels, get competing bids from other, reputable companies. And always ask plenty of questions and consider the answers you’re being given.