How to Use the New Inflation Reduction Act Solar Tax Credit | USTaxAid

Diane Kennedy's Blog

How to Use the New Inflation Reduction Act Solar Tax Credit

Written by Diane Kennedy, CPA on September 2, 2022

The Inflation Reduction Act of 2022 has several new clean energy credits. One of those will be an extension of, and slight revision of, the existing solar energy tax credit.

The new Residential Clean Energy Credit will allow you to subtract 30% of cost of installation of solar heating, electrical generation and other solar products directly from your federal taxes. This is a tax credit, not a tax deduction.
What Is the Solar Tax Credit?

If you install solar energy equipment in your residence any time in 2022 through the end of 2032, you are entitled to a nonrefundable credit off your federal income taxes, equal to 30 percent of eligible expenses. A few highlights:

There is no limit on the expenses. You can spend $100K and still get 30% as a tax credit.

This is a nonrefundable credit, which means that it can only be used against your taxes due. You won’t get a “refund” that is more than your taxes.

You can carryforward unused solar tax credits for up to 5 years.

There is no income threshold at which you lose the tax credit.

 

You must purchase the solar units. Leasing them won’t work for the tax credit.

 

You can still get the federal tax credit if your state also offers one. However be careful that your state is okay with you getting a federal tax credit.

Expenses That Are Eligible for the Solar Tax Credit.

The same expenses are eligible for the credit that were eligible before, with one little gotcha at the end. These expenses include:

 

Solar photovoltaic (PV) panels.

 

PV cells used to power an attic fan (but not the fan itself).

 

Contractor labor for onsite preparation, assembly, or original installation.

 

Permitting fees, inspection costs, and developer fees.

 

All equipment needed to get the solar system running, including wiring, inverters, and mounting equipment.

 

Storage batteries. (You can claim the tax credit for these even if you buy and install them a year or more after you install the solar system.)

 

Sales taxes on eligible expenses.

 

Note that battery storage units must store at least 3 kilowatts under the new law.

 

Can You Use This Credit If You Also Use Other Federal Energy Tax Credits?

Yes. The new law under Inflation Reduction Act also includes the Nonbusiness Energy Property Credit.  This tax credit covers energy efficient upgrades including:

Energy Star certified exterior windows,

Energy Star certified exterior doors,

Air-sealing insulation,

Upgraded electrical circuit panels, and

Heat pumps.

You can claim both credits on your federal return. You can also claim the credits in multiple years, provided you made additional qualifying purchases in those years.

Make sure you check the law before you purchase, though, since there are dollar caps. For example, there is a cap of $600 on windows. You can claim 30% of the cost on other items up to $1,200 total annually. Heat pumps are exempt from the maximum. You can claim up to $2,000 for heat pump purchase and installation.

Next Steps

We have some brand-new law with a few changes. Like most of tax law, it is best to take a minute and look at the strategy behind it.

 

Some of the things to consider:

What impact will taking this tax credit make on your state taxes?

Are you better off staggering the energy efficient purchases so you have multiple years of credits?

And, as with all things tax-related, make sure you’re keeping good records.

Leave a Comment

SIGN UP TO DIANE’S FREE NEWSLETTER!

  • Three weekly emails with free tax updates
  • Exclusive deals on products and services
  • FREE Video: How to Write Off Practically Anything