Maximize Solar Savings: 2024 Federal Residential Clean Energy Credit
Introduction:
As we usher in the year 2024, there's exciting news for New Jersey, New York, and Connecticut homeowners who are considering harnessing the power of solar energy for their homes. The US Federal government continues to support sustainable living by offering significant tax incentives for those investing in solar technologies. One of the main federal solar tax incentives that you can claim as a New Jersey, New York, and Connecticut homeowner is the Residential clean energy credit. In this blog post, we will delve into how you can leverage the benefits of the Residential clean energy credit as you file your 2024 Federal taxes.
What is the Residential clean energy credit?
The Residential clean energy credit is a tax incentive that introduces an individual income tax credit for the cost of installing various residential clean energy systems. This tax incentive is explicitly stated in the Internal Revenue Code which is a compilation of all the US Federal tax laws. The following is a summary of its primary details:
Homeowners who own homes with installed solar energy equipment are eligible for the Residential clean energy credit
With this incentive, comes a 30% federal solar credit of the total cost incurred during the installation of solar energy equipment
The Residential clean energy credit terminates for solar energy equipment installed after December 31, 2034.
The Residential clean energy credit also covers the installation of other renewable energy requirements for residential use such as fuel cells, small wind turbines, geothermal heat pumps, and home battery storage systems.
This tax incentive allows you to carry over excess credit from a previous tax year to the subsequent tax year.
The Residential clean energy credit does not provide any income limits needed to claim the full the 30% Federal Solar Tax Credit
This tax incentive does not provide any limitations on the size of the solar energy equipment needed to claim the full federal solar tax credit.
The 30% federal tax solar credit provided by the Residential clean energy credit is slated to reduce in the coming years.
This means that the sooner you invest in solar energy equipment, the higher the amount of federal solar tax credit you will get to enjoy.
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What costs are covered by the 30% Residential Clean Energy Credit?
The Residential Clean Energy Credit covers the four costs displayed in the following pie chart:
How does the Residential Clean Energy Credit affect my federal tax liability?
To better understand how the 30% Residential clean energy credit affects your federal tax liability, let us look at the following scenarios:
Scenario A: Federal Tax liability is less than the Federal Solar Tax Credit
Let us assume that you installed a solar electric system in your home in 2023 and all its installation and labor costs amounted to $30,000.
To calculate the amount of federal solar tax credit you will receive, you simply multiply 30% by $30,000 to obtain a tax credit of $9000.
A $9000 federal solar tax credit would decrease your 2024 federal income tax liability by $9000.
This means that if your 2024 federal income tax liability is $10,000, the $9000 federal solar tax credit will reduce your federal tax liability from $10,000 to $1000 ($10,000 - $9000 = $1000).
A reduction in your 2023 tax liability will benefit you in the following ways:
It allows you to spend a lot less money settling your federal income tax dues
It allows you to keep a significant amount of your income
It allows you to have a lot more disposable income to allocate to other investments
The massive financial savings that accompany the reduction of this federal tax liability allow you to experience a quicker return on your initial solar energy investment
Scenario B: Federal Tax liability is less than Federal Solar Tax Credit
For this scenario, let us assume that your 2023 solar installation costs remain at $30,000.
Based on the $30,000 solar installation costs, $9000 (30% of $30,000 is $9000) will still be your 2024 Federal Solar Tax Credit.
If your 2024 federal income tax liability is $8000, then your $9000 federal solar tax credit will reduce your federal tax liability from $8000 to $0 as you cannot have a federal tax liability less than $0.
You are also legally allowed to carry forward the remaining $1000 ($9000 - $8000 = $1000) worth of federal solar tax credit to your 2025 taxes. An elimination in your 2023 federal tax liability will benefit you in the following ways:
It frees up your entire federal tax liability for other purposes such as home improvements costs
It boosts your long term financial savings as it makes it easy for you to continue benefiting from the solar tax credit until it is fully utilized
The massive financial savings that accompany the elimination of this federal tax liability allow you to experience a quicker return on your initial solar energy investment.
From both scenarios, it is nothing short of obvious that the installation of solar energy equipment in your home will bring both short term and long term benefits regardless of whether the federal solar tax credit is less than or more than your federal tax liability in any given taxable year. Investing in a solar energy system for your home will not only provide you with massive financial savings but will also reduce your reliance on conventional, non-renewable energy sources that are not eco-friendly.
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Who qualifies for the 2024 Residential clean energy credit?
To qualify for the 2024 Residential clean energy credit, you must ensure that the installed solar energy equipment meet the following special considerations:
The solar energy equipment must have been installed in a US based home that you owned and occupied in 2023
The home with the installed solar energy equipment does not have to be your primary dwelling place, it can also be a secondary residence.
According to the Internal Revenue Service (IRS) website, a home that qualifies for this tax incentive can be any of the following dwelling places:
“a house, houseboat, mobile home, cooperative apartment, condominium, and a manufactured home that conforms to Federal Manufactured Home Construction and Safety Standards.”
The solar energy equipment that make up the solar electric system must be used to provide the solar energy needed to meet the electricity needs of your home
The solar energy equipment that make up the solar heating system must be used to supply the sheer majority of the solar energy (a minimum of 50%) needed to meet the water heating purposes of your home
The solar water heating system must be certified for performance by the Solar Rating Certification Corporation or any other reputable entity supported by the government of the respective State where the solar heating system is installed.
How can I claim the Residential Clean Energy Credit?
To claim the 30% Residential Clean Energy Credit, New York, New Jersey and Connecticut homeowners like yourself will have to file Form 5695 (Residential Energy Credits) alongside your annual income tax return.
The latest version of Form 5695, 2024 Form 5695, can be found on the IRS website. Before filing Form 5695, it is advisable to read and understand the Instructions for filling this form.
The form is divided into two major parts. The first part of Form 5695 (Residential Clean Energy Credit) allows you to provide all the details needed to claim your Residential Clean Energy Credits specifically for the installation of solar energy equipment and panels.
The second part of Form 5695 (Energy Efficient Home Improvement Credits) allows you to provide all the details needed to claim tax credits for energy efficient home improvements, such as insulation, windows, doors, and energy efficient heating and cooling equipment. It does not cover solar panels or other solar energy equipment.
How to fill out PART 1 of Form 5695 for solar panels?
Follow the steps below when completing the Residential Clean Energy Credit section of Form 5695
Ensure that you meet all the qualifications stated earlier in this blog.
Obtain the following key details in advance so as to streamline the form filling process:
The physical address of the home with the installed solar energy equipment
The total costs incurred during the installation of the solar energy equipment
The total labor and installation costs incurred during the installation of any other renewable energy requirements for residential use such as fuel cells, small wind turbines, geothermal heat pumps, and home battery storage systems.
Any unused Residential Clean Energy Credit carried forward from 2023
Provide all the key details requested by Part 1 of Form 5695
Leave Part 2 of Form 5695 empty if you are only claiming the federal solar tax benefits of installing solar energy equipment.
Once Form 5695 is completely and accurately filled out, attach it to the Form 1040 that you used to file your 2023 federal income tax return and then submit both forms to the IRS.
Conclusion
The enormous tax incentives linked to the Residential Clean Energy Credit make going solar a no-brainer. By making the switch to solar, you not only enjoy immediate financial advantages but also contribute to a sustainable and eco-friendly future. The best time to embrace clean and sustainable energy for your home and to take full advantage of the massive solar savings that accompany the installation of solar energy equipment is NOW. Consult with our solar experts today to schedule a free consultation that will help you explore how you can leverage the Residential Clean Energy Credit to make your home more energy-efficient and eco-friendly. Let's turn your vision of solar-powered living into a reality in 2024!
Disclaimer: Hifadhi Solar does not provide tax or accounting advice. The information on solar tax credits and matters presented in this blog has been prepared for general educational purposes only. It does not constitute professional tax advice and should not be relied on to make decisions about your taxes or finances. You should consult a qualified tax advisor or accountant about how tax laws and incentives apply to your specific situation before making financial decisions related to solar installations or tax credits.