Solar Credit 2022 vs. 2023: What’s the Difference?

The federal solar tax credit is a significant incentive for homeowners considering a transition to renewable energy. This credit directly reduces the amount of income tax a person owes, making the investment in a solar energy system more financially manageable. The regulations that define this credit, concerning the credit percentage and the types of equipment that qualify, experienced notable adjustments between the 2022 and 2023 tax years. These changes were brought about by new legislation, altering the landscape for taxpayers who installed solar power systems.

Understanding the 2022 Solar Credit Rules

For homeowners who placed a solar energy system in service during the 2022 calendar year, the rules for the federal tax credit underwent a last-minute change. For most of the year, the tax credit was scheduled to be 26% of the total system cost as part of a planned phase-out. However, the passage of the Inflation Reduction Act in August 2022 altered this landscape retroactively.

This new law increased the credit percentage from 26% to 30% for any qualifying system placed in service during the entirety of 2022. This means that even if a homeowner installed their system in the early months of the year, when the 26% rate was expected, they are eligible for the higher 30% rate on their 2022 tax return. This retroactive application provided an unexpected financial benefit to many early adopters during that year.

The qualifying expenses under the 2022 rules were comprehensive, covering the core components of a residential solar installation. These costs included the solar panels, power inverters, all associated wiring and mounting hardware, and the costs of labor for on-site preparation, assembly, and original installation.

A specific rule in 2022 applied to battery storage systems. To qualify for the credit, the battery had to be charged exclusively from the associated solar panels. This requirement was a key distinction that would change in the following year, making the 2022 rules more restrictive for energy storage additions.

Navigating the 2023 Solar Credit Rules

For systems placed in service starting January 1, 2023, the solar tax credit operates under a new name: the Residential Clean Energy Credit. The credit rate was established at 30% for the 2023 tax year, providing continuity from the retroactive rate set for 2022. This extension removed the uncertainty that surrounded the credit’s value in the previous year.

The most substantial change in the 2023 rules involves the requirements for battery storage. The previous rule that a battery must be charged exclusively by solar power to qualify was eliminated. Under the updated guidance, battery storage systems with a capacity of 3 kilowatt-hours (kWh) or more are eligible for the 30% credit, even if they are charged from the electrical grid.

The range of qualifying expenses for the Residential Clean Energy Credit in 2023 remains broad, encompassing the full cost of the solar energy system. This includes the photovoltaic (PV) panels, inverters, wiring, and installation labor, just as in 2022. Sales taxes paid on these eligible expenses can also be included in the total cost when calculating the credit.

This updated framework for 2023 provides homeowners with greater flexibility in designing their clean energy systems. The ability to include a qualifying battery, regardless of its charging source, allows for more resilient and versatile home energy setups.

Information Needed to Claim the Credit

To properly claim the Residential Clean Energy Credit, a taxpayer must gather specific information to complete IRS Form 5695, Residential Energy Credits. This form is used to calculate the total amount of the credit and report it on the taxpayer’s annual income tax return.

The first piece of information needed is the total gross cost of the solar energy system. This figure should include the cost of all qualifying components, such as the solar panels, inverters, and any eligible battery storage, as well as all labor costs for installation. Homeowners should have detailed invoices and receipts from their installer to substantiate this total cost.

Another detail is the date the system was “placed in service.” The IRS defines this as when the installation is complete and the system is ready and available for use. This date determines the tax year for which the credit can be claimed. For example, if a system was fully installed and operational on December 20, 2023, the credit would be claimed on the 2023 tax return, even if the final payment to the installer was made in 2024.

Once this information is gathered, the taxpayer will use it to fill out Part I of Form 5695. The total qualified expenses are entered on the form, which then guides the user through calculating the credit. The form also helps determine if there are any limitations on the credit based on the taxpayer’s tax liability.

Filing for the Credit on Your Tax Return

After all necessary information has been gathered and Form 5695 has been accurately completed, the final step is to file it with the annual tax return. The completed Form 5695 must be submitted as an attachment to Form 1040, the U.S. Individual Income Tax Return. The total credit amount calculated on Form 5695 is transferred to Schedule 3 (Form 1040), Additional Credits and Payments.

The credit is nonrefundable, which means it can reduce a taxpayer’s liability to zero, but no portion of it will be paid out as a refund beyond that amount. The credit is applied directly against the tax owed, providing a dollar-for-dollar reduction.

A feature of the Residential Clean Energy Credit is its carryforward provision. If the calculated credit is greater than the taxpayer’s total tax liability for the year, the taxpayer does not lose the excess amount. The unused portion of the credit can be carried forward to the following tax year to reduce that year’s tax liability.

This carryforward can continue for the life of the credit. For example, if a taxpayer has a $9,000 credit but only a $6,000 tax liability in 2023, they would use $6,000 of the credit to eliminate their 2023 tax bill. The remaining $3,000 would then be carried forward to be applied against their 2024 taxes.