How the Federal Tax Credit Works

Disclaimer: This blog provides an overview of federal tax incentives for residential solar and alternative energy sources (photovoltaics or PV.) We’re solar people, not tax professionals, and this blog does not constitute professional tax advice. It should not be used as the only source of information when making purchasing decisions related to residential energy or for tax filing. Consult a tax professional to determine what makes sense for you.

For many homeowners, going solar is a great opportunity to save on monthly energy bills and reduce your dependence on your utility company. The federal tax credit for going solar can make this investment an even more attractive option.

A tax credit is a reduction in the amount of taxes you owe, according to the IRS. And solar installations often qualify for the Residential Clean Energy Credit.

As of 2024, the applicable credit percentage are:

  1. In the case of property placed in service after December 31, 2021, and before January 1, 2033, 30%.
  2. In the case of property placed in service after December 31, 2032, 26%.

For example, a homeowner who finances an 8 kilowatt solar installation for $30,000 could see a tax liability reduction of $9,000 if the credit is 30%. Taking advantage of this credit is easy as A-B-C, if you know the eligibility requirements and how to claim it.

Tax Credit Eligibility

According to the U.S. Department of Energy, to qualify for the solar federal tax credit, you must meet all of the following requirements:

  • You must own your home (renters are excluded, unfortunately).
  • The solar panel system must be new or is being used for the first time.
  • You must own your solar panels.

This last point isn’t quite as obvious as it might seem, since some homeowners choose to lease their solar systems through third-party companies. While leasing may make sense in some situations, it means that the leasing company gets to claim the tax credit instead of you. By contrast, homeowners that buy their panels outright or finance them with a loan (through the Mosaic platform, for example) may get to claim the tax credit.

How Do I Claim the Tax Credit?

To claim the tax credit, you must file IRS Form 5695 as part of your tax return. You'll calculate the credit on the form, and then enter the result on your individual tax Form 1040.

If in last year’s taxes, you ended up with a bigger credit than you had income tax due, you can’t get money back from the IRS. Instead, you can generally carry the credit over to the next tax year. It’s important to understand that this is a tax credit and not a rebate or deduction. Tax credits offset the balance of tax due to the government (therefore, if you have no tax liability, there is nothing to offset and you can’t take advantage of it).

If you failed to claim the credit in a previous year, not to worry! You can file an amended return.

How Do I Use the Tax Credit to Pay Down My Loan?

Mosaic’s solar loan programs are built to be flexible, simple and affordable — and, in the case of CHOICE loans, the monthly payments are specifically structured with the federal tax credit in mind. However, whether you opt for a CHOICE or a PLUS loan, you have the option of reducing your monthly loan payments by using your federal tax credit — or your own savings. Here’s how it works:

CHOICE: Mosaic’s CHOICE loan product is structured with the federal tax credit in mind, with lower monthly payments you can lock in by applying the full amount of your credit. Here’s how it works:

  • If you make the voluntary CHOICE prepayment before the end of month 18, it can reduce your monthly payment beginning in month 19
  • The earlier the CHOICE payment is applied, the lower future payments will be
  • If you pay down your loan by less than the specified CHOICE target loan balance, your monthly payment goes up

It’s your CHOICE!

PLUS: Mosaic’s PLUS loan product — which can be used to finance other home improvements, in addition to solar and batteries — has monthly payments that do not assume the use of the federal tax credit. However, if you opt to use either the tax credit or personal savings to make voluntary prepayments to reduce your loan principal in the first 18 months, your monthly payments will be reduced for the remainder of the loan term — just like CHOICE. However, unlike CHOICE, if you choose to not make any extra pre-payments, your monthly payments will not increase.

In both the CHOICE and PLUS products, your decision of how much or whether to pay down will never change your interest rate, and there are never any prepayment penalties.

We highly recommend that you consult a tax advisor about your personal federal tax credit eligibility to determine if you can take advantage of the tax credit and apply it to your loan. For non-tax related questions, we also have a wonderful customer support team waiting to answer any additional questions you may have.

* Availability of Federal & State Tax Credits is dependent on your unique financial situation. Please consult a tax professional regarding your eligibility.

Home Improvement Loans through the Mosaic platform are made by WebBank, Equal Housing Lender.