How to Qualify for a Solar Tax Credit

Investing in solar power can seriously benefit your wallet and the environment. But the upfront cost can be hefty, which may make the process less appealing. Fortunately, some states offer incentives to residents willing to make the change. And if you invest soon, you can take advantage of the federal solar tax credit, as well.

Read on to learn about solar tax credits, how they work, and how you can qualify for them.

What Is a Solar Tax Credit?

A solar tax credit is a financial incentive from the government for those who opt to use solar power over traditional types of energy. While some states offer their own credits, the most well-known one is the federal solar Investment Tax Credit, or ITC.

How Does the Federal Solar Tax Credit Work?

It's important to understand that a credit isn't a rebate or an upfront discount. When you receive a quote for a solar panel installation, it might include a line item listed as an incentive, or something similar.

An example from US Solar Institute breaks the ITC down like this: if you're quoted $25,000 for a solar system, and your quote contains an incentive worth $7,500, that doesn't mean you're shaving that incentive off the cost. You still have to pay $25,000 out of pocket for the system, but the IRS will recognize that $7,500 incentive as eligible tax credit.

How to Qualify for a Solar Panel Tax Credit

Whether or not you qualify for a particular solar tax credit depends on the state, but you can begin your investigation with DSIRE and check federal or state options. Alternatively, Solar-Estimate can also show what kinds of solar incentives — or lack thereof — exist for your location. It also lays out average amounts for things like cost, payback time, lifetime savings, cost if you don't get solar, and annual power production.

However, be aware that many of these calculator sites are also trying to sell installations. So while they can be useful, you might have to hand over your email or other information to receive a quote. And if you use more than one, you might see varying numbers.

SEE ALSO: Here's Everything You Need to Know About Tax Season

It's also good to know whether or not your state has a net-metering policy. Basically, these reward consumers using solar systems by having utility companies pay them for excess electricity produced through the systems. Not all states have these policies, and those that lack them don't have to pay you anything.

Some utility companies may offer net metering in these states, though those incentives could also be offset if you're forced to pay a fee. For instance, Alabama has no net-metering policy; only one company in the state provides payment for excess energy produced, but solar customers must also pay for the privilege of having solar.

The Future of the Federal Solar Tax Credit

Currently, the ITC is a credit equal to 26% of the qualified system costs of installing a solar panel system. However, the credit was 30% until this year, and it'll drop to 22% next year. By 2022, the residential credit will be at 0%. So if you're planning to invest in solar power, it's better to do it now rather than wait too long.

Readers, have you invested in solar power? Tell us about your experience in the comments below.