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Federal Solar Tax Credit in 2021 and Beyond

May 20, 2021

The Solar Investment Tax Credit (ITC) is a federal solar incentive designed to drive down the cost of installing solar projects on residential and commercial properties. The ITC allows solar customers to claim a one-time tax credit if they finance their solar photovoltaic (PV) systems with cash or loans.

How does the Solar Investment Tax Credit work?

When first introduced in 2006, the ITC offered participants a tax credit worth 30% of the total solar installation cost (parts and labor). So, if you purchased a solar system that cost $10,000, you would qualify for a $3,000 credit that you could apply to your next IRS bill. In effect, your solar installation would end up costing only $7,000 (or 30% off the original price). However, the ITC has undergone significant changes in the past few years, with even bigger ones on the horizon. And if you are thinking about going solar, it is important you understand the impact of these developments.

What is different about the ITC in 2021?

Incentives exist to help jumpstart new industries and encourage widespread adoption, and the ITC has accomplished precisely that for the solar sector.

According to the Solar Energy Industries Association (SEIA), the ITC has helped the industry grow more than 10,000% since 2006 – with an estimated 50% annual growth in just the past decade alone. As solar continues to go mainstream, some argue that the industry has less need for incentives like the ITC. Thanks to economies of scale and R&D, the technology is increasingly within the financial reach of homeowners across the country. These price drops have helped make going solar more affordable, which has allowed those with modest budgets to save on their utility bills and reduce their environmental impact.

In response to dropping solar costs, the ITC was reduced from 30% to 26% for both residential and commercial solar applications at the end of 2019. It was originally scheduled to drop even further at the end of 2020, but last December, the 26% rate was extended for all solar systems (residential and commercial) through the end of 2022. To qualify for the 26% incentive, your solar system must begin construction by December 31, 2022. After 2022, the ITC will undergo the following downgrades:

  • The ITC drops to 22% for all solar projects that begin construction by the end of 2023
  • After 2023, the ITC permanently drops to 10% for commercial solar projects.
    For residential customers, the ITC permanently drops to 0%.

Note: Customers who use solar leases are not eligible for this program.

Why delaying your solar investment is a mistake

If you’ve considered adding a new solar energy system to your home, you may be tempted to put off your investment so that you can take advantage of even lower prices in the future. Tomorrow’s solar panels will indeed likely be cheaper than they are today. However, those savings vanish once you factor in generous programs like the ITC. Through the end of 2022, it is still possible to knock 26% off of the total installation price if you move quickly enough. But if you wait too long, you risk paying full price for a system that the government is willing to subsidize today.

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