Claiming Your Vermont Solar Tax Credit

While Vermont once offered a state income tax credit for new solar installations, this program has been discontinued. Homeowners can no longer claim a new credit for installing a solar energy system. However, Vermont residents can still take advantage of the significant federal tax credit for solar, along with other state-level incentives that help lower the cost of adopting clean energy.

The Federal Residential Clean Energy Credit

The federal Residential Clean Energy Credit allows homeowners to deduct a percentage of the cost of a new, qualified clean energy system from their federal income taxes. To claim this credit, taxpayers must file IRS Form 5695, Residential Energy Credits, with their annual federal tax return.

The costs that qualify for the federal credit include:

• The price of solar panels or photovoltaics, inverters, and the wiring and mounting equipment needed to connect the system to the home.
• Labor costs for the on-site preparation, assembly, and original installation of the system.
• Any permitting fees and inspection costs.
• The cost of battery storage technology with a capacity of 3 kilowatt-hours or more.

For systems installed between 2022 and 2032, the federal credit is set at 30% of these qualifying expenses. This percentage is applied to the total cost basis of the eligible equipment and installation. There is no maximum dollar limit on the federal credit. The credit is nonrefundable, meaning it can reduce a taxpayer’s liability to zero, but no portion will be paid out as a refund.

Other Vermont Solar Incentives

Homeowners who install solar panels benefit from a complete sales tax exemption on their renewable energy equipment, which reduces the upfront cost of the system.

Additionally, Vermont offers a property tax exemption for renewable energy systems. This means that the value added to your home by a new solar installation will not increase your property taxes, ensuring that your investment in clean energy doesn’t lead to a higher annual tax burden.

Managing Previously Claimed Vermont Credits

Taxpayers who claimed the Vermont solar credit before it was discontinued may find that the credit is larger than their state tax liability for that year. In this situation, the state has a carryforward provision that allows the unused portion of the credit to be applied to future tax years. Unused solar energy investment tax credits can be carried forward for up to five years following the year the credit was first claimed.

There are also circumstances under which a portion of a previously claimed credit may need to be repaid, which is known as recapture. Recapture can be triggered if the taxpayer sells the home or stops using it as their residence within five years of placing the system in service. The amount of the recapture decreases for each year the property was in service.