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  • Writer's pictureTiana Starks

Federal Taxes & Your Solar Panels: Everything YOU Need to Know!

Investing in a solar panel system is a big commitment, and most homeowners will want to weigh the pros and cons before making such a large financial decision. Solar panels can be incredibly costly upfront, but they have many benefits, including reducing or eliminating energy bills, earning tax credits and rebates, and being beneficial to the environment.

Luckily, the federal government offers a tax credit for the installation of solar panels. This tax credit is equal to 26% of the initial installation cost, and it gets applied to your federal income taxes.

Here’s everything you need to know about the federal solar tax credit.

There are two different solar tax credits. There is one for residential installations and one for commercial installations. However, people refer to them both as the solar tax credit, or the ITC. The solar tax credit was first enacted in 2005 as part of the Energy Policy Act of 2005, and it began as a tax credit of 30% of the cost of your solar panel system.

This credit was scheduled to expire in 2007, but the popularity and success it had with expanding the solar industry led to it being extended in 2008. It was extended again in 2015, but with this extension, Congress implemented a system where the tax credit lessened over time.

As of 2020, the tax credit is 26% of the cost of solar installation for home and business owners. The tax credit was scheduled to drop to 22% of the cost of solar installations for home and business owners in 2021. However, in December 2020, Congress passed a spending bill that included a two-year extension of the 26% tax credit for solar energy, rather than expiring at the end of 2020 as they would have under the previous law. The ITC will fall to a 22 percent rate for projects that begin construction by the end of 2023. In 2024 and beyond, the federal tax credit will expire for residential solar installations. For commercial solar installations, the credit will continue at 10% of the solar system's cost.

Let’s calculate!

It’s easy to figure out how much the federal government will credit you for your solar panel installation because the credit is equal to 26% of the total cost of the installation.

For example, if your solar installation costs $18,170, your federal tax credit will be 26% of that number, which comes to $4724.20. When you subtract the credit from your installation, it brings the cost down to just $13,445.80!

However, there is another factor you should consider when you are purchasing your solar panels, and that is how much you’ll be saving per year. With our solar calculator, you can enter your specific utility usage details and see just how much you can save.


Eligibility for this tax credit is simple as well. Anyone who pays for a solar panel installation on their home or business can file for it as long as they have a tax liability in the year of installation. In simplest terms, this means if you owe income taxes during the year of your solar panel installation and you are the owner of the solar panels, then you qualify for the tax credit.

Are solar panels right for you?

Solar panels can be a significant investment, and not everyone has the cash on hand to pay the upfront costs of a solar panel installation. Solar financing options can help you make the switch, save money on your electric bill, and help the planet. When considering solar panel financing, compare your monthly electric bill savings to the loan’s monthly payments. Also keep in mind that buying the system outright makes you eligible for financial incentives through the federal government.

Interested in finding out more about solar panels and solar financing in the Michigan area? Request a Quote, and a Solar King representative will contact you.

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