Filing taxes

A Homeowner’s Guide to the Federal Solar Tax Credit for 2021

written by Claudia Grant
reviewed by Drew O. Mark
July 29, 2021

Solar power is the way of the future in the United States. Today, there is enough solar power capacity to cover 18 million households.

The rapid transition to solar energy comes as no surprise. Homeowners can reduce their monthly utility bills while helping the environment at the same time.

Even the federal government is weighing in to help entice homeowners to convert to solar. Uncle Sam is offering up a generous federal tax credit to help Americans pay for solar.

Read on for a homeowner’s guide to the federal solar tax credit. Explore how Americans are switching to solar by utilizing solar tax incentives.

How Much Does Solar Cost?

Before we dive into 2021 federal tax credits, it is important to understand why they are necessary. Switching to solar is not cheap. The total project cost varies depending on a number of factors.

The size of your roof is a major determining factor. Solar panels are installed on your roof and collect energy from the sun.

Your home’s energy needs dictate how many solar panels are necessary. A larger home consumes more energy and requires greater collection. More solar panels on the roof are ultimately going to drive the price higher.

There are different types of solar panels and some are more expensive than others. You also have to pay for the labor to install the solar panels.

The area where you live is going to drive the price significantly. Labor rates are more expensive in certain states.

There is also a labor divide in urban vs. rural settings. More densely populated areas naturally have a higher cost of living. This leads to higher labor rates in cities as opposed to small towns.

Hawaii is the most expensive state to switch to solar. The cost of importing materials is high and a 6kW system is going to run you nearly $20,000.

In the South, however, you can get the same system for less. In Florida and Arizona, for example, a solar system costs less than $14,000.

Some states are offering up tax help for switching to solar as well. The amount and eligibility vary based on the state you reside in. Along with the federal solar tax credit, state assistance is going to reduce your total project cost.

What Is the Federal Solar Tax Credit?

The federal government recognizes the significant upfront cost of switching to solar. At the same time, the government is prioritizing clean energy and wants to reduce costs. The federal government’s solution was to pass a tax credit to help Americans pay for solar.

Personal tax credits are more beneficial to Americans than normal deductions. Instead of simply reducing your taxable income, a credit directly reduces your tax liability. A tax credit works as a dollar-for-dollar reduction in the amount that you owe the government.

As far as the solar tax credit goes, you can deduct 26% of your alternative energy purchase. This 26% tax credit is in place until the end of calendar year 2022.

There is a push to get Americans to convert to solar faster. The tax credit drops to 22% on January 1st, 2023. The tax credit is currently not on the books for any solar energy purchases made in the calendar year 2024.

Evaluate your tax situation

By evaluating your tax situation, you can identify areas where you may be able to reduce your tax burden and make informed decisions about your financial future.


What Are the Eligibility Requirements?

Before you start counting on this deduction, it is important to make sure you are eligible. There are a number of different eligibility requirements to meet in order to claim the tax credit.

For starters, you need to purchase and install a solar photovoltaic (PV) system. The Internal Revenue Service (IRS) makes it clear that the system must generate electricity for your home.

The electricity generated can be for your primary or secondary residence. However, it cannot be part of a community solar project. If it contributes to a community energy source, any tax incentives must be claimed under a different tax savings program under Section 25D.

Another requirement is that you own or are financing the solar power system. The tax credit is not applicable to homeowners that opt to lease their system. A lease agreement is essentially a rental program and the equipment does not belong to the homeowner.

Lastly, the solar equipment needs to be new or used for the first time. This is to prevent tax incentives from being used more than once for the same equipment.

What Expenses Are Covered Under the Tax Credit?

The American taxpayer naturally wants to minimize their tax liability. Therefore, they want to use the 26% credit on every possible expense related to the solar power conversion.

Of course, solar panels are eligible for the tax credit. The installation labor and materials are also covered.

There are some other expenses to make sure you fold into the tax credit. All wiring, inverters, and mounting equipment are also eligible.

A solar energy storage device can be claimed as well. Lastly, the sales tax added to your total project cost is also included under the federal tax credit.

What Are Some Other Tax Considerations?

There are a few important things to note before finalizing your tax credit claim. For instance, you cannot include any rebates offered by a private company.

Consider a scenario in which a solar company gives you a $2,000 rebate to make the switch. This rebate is excluded from any claimed tax credit. At the same time, you do not need to make this downward adjustment for state tax credits.

Some companies offer a statement credit or a cash incentive for converting to solar. This is actually treated as taxable income and is not included in the tax credit calculation.

Is the Solar Tax Credit Worth It?

This tax incentive is definitely worth pursuing. Not only is it helping the environment, but the tax credit is yielding thousands in savings. In the vast majority of states, this tax credit is worth more than $3,000.

Start off by making sure you are eligible. This means you meet criteria like owning the system and using it to produce electricity. If you need help claiming the 2021 Federal solar tax credit, contact us today for assistance.

Claudia Grant

Claudia Grant is a seasoned financial expert with a rich and diverse background. Holding a Master of Science in Taxation, Claudia's 15 years as a CPA and ten years as a financial manager have shaped her into a true industry authority. Departing from the traditional office setting, Claudia now thrives as a tax and financial consultant, catering to a wide array of companies. Her passion for sharing knowledge shines through her insightful articles, where she breaks down complex financial concepts into simple pieces. Claudia's expertise and dedication make her an invaluable resource for businesses seeking adept financial guidance in an ever-evolving landscape.
Read more