How the Solar Tax Credit Works
Installing solar panels on your home can get you dramatic savings on electricity bills. Part of how you save so much over time is with the federal solar tax credit. This 26% credit can supercharge the savings of solar panels on your home. Here is how the solar tax credit works.
The solar tax credit allows homeowners to deduct 26% of their solar installation costs from their federal income taxes the year it’s installed. This applies to the entire project cost.
For example, if you finance $50,000 over 25 years for a solar system (instead of paying the electric company around $90,000 over 25 years), you can claim a $13,000 tax credit (26% of $50,000). When you file your taxes after installing solar, your federal tax bill will be reduced by that amount.
The credit originally applied to systems installed between 2006 and 2022. But recent legislation has now extended the 26% rate through the end of 2034.
Maximizing the Value of the Credit
Most homeowners finance their solar array over many years instead of buying outright. This spreads out the cost into more manageable monthly payments and effectively replaces your electric bill with one that is a fixed rate so it doesn’t continue to increase.
When you claim the tax credit after installing solar panels, you have two main options:
- Apply the credit amount towards lowering your system cost and monthly payment.
- Keep the credit to spend it on something else.
Here’s how each scenario plays out:
Applying Credit to Lower System Cost
If you opt to apply the $13,000 credit to your $50,000 solar loan, it will lower the remaining balance to $37,000. With a smaller principal amount left to pay off, your ongoing monthly payments decrease substantially.
Fixing the rate for your solar costs tens of thousands less over time than to continue paying the electric company their increasing rates.
Keeping the Credit for Other Uses
Alternatively, you can keep the $13,000 credit and use it for another purpose – like paying your tax bill or funding home improvements. This tends to still be much less expensive over time than staying with the energy companies increasing rates. So it’s still a win.
Both options are valid choices; It’s all money that you didn’t have before, you are just deciding where you want to spend it.
Weighing the Options
There are good arguments for both paths. Lowering your payments provides larger compounding savings on that specific bill. But the flexibility of keeping the credit may work better for some budgets who prefer to save on another expense instead.
It’s your money either way, you just get to decide what to spend it on! With either option, you escape the monopoly of the energy company and protect yourself from your rates continuing to go higher and higher.
