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Tax exemptions are valuable incentives in the solar industry that can help reduce the costs associated with integrating solar panels into your home. Unlike income tax credits, these incentives are not dependent on your income level.
There are two main types of tax exemptions: solar sales tax exemptions and solar property tax exemptions.
Solar sales tax exemptions help lower the upfront expenses of transitioning to solar energy. In states where sales tax is applicable, individuals may have to pay a sales tax ranging from 2.9% to 9.5% on the total cost of a solar installation. However, 17 states completely exempt this purchase from sales tax, while five states do not impose any sales tax at all.
On the other hand, solar property tax exemptions aim to reduce the tax burden on homeowners by excluding the value of their solar systems from the tax assessment of their properties. Essentially, these exemptions prevent homeowners from paying additional taxes based on the increased value attributed to their homes by solar installations.
How Solar Property Tax Exemptions Function
Properties with solar panels are considered more valuable than those without. Determining the exact value they add can be difficult, as there is no agreed-upon method for assessment.
Studies show a 4% increase in home value with solar panels, but more detailed analyses suggest the initial increase is equal to the system’s cost after incentives, decreasing as the panels age.
In positive news, 29 states have rules exempting some or all of the added value from solar panels from local property taxes. Four states even allow local governments to create their own tax incentives for solar properties.
Impact on Property Taxes in States without Exemptions
Thirty-six states offer property tax exemptions for solar energy systems, according to the Solar Energy Industries Association. For instance, New Jersey exempts solar systems from local property taxes if they are used to meet on-site electricity, heating, cooling, or general energy needs.
In states without solar property tax incentives, it is difficult to find specific data on real property tax increases due to solar installations. However, based on the average value of a solar system, one can estimate potential additional taxes. In 2016, ATTOM Data Solutions reported that residential property taxes in states without personal property tax exemptions for solar projects varied from 0.48% in Alabama to 1.89% in Pennsylvania.
For example, if an average solar PV system costs $13,000 after incentives, homeowners in these states could expect to pay an extra tax of $62 to $245 in the first year after installation.
Understanding Solar Sales Tax Exemptions
States are encouraging homeowners to switch to clean energy by providing sales tax exemptions for residential solar projects. Without these exemptions, homeowners could end up paying an additional $800 to $1,300 in sales tax for an average $18,000 solar system. On the other hand, states with these exemptions allow homeowners to save between $980 and $1,700 when adding solar to their homes.
Sales tax incentives often exempt solar energy system purchases from state sales tax (or sales and use tax), reducing the upfront costs of installation. Twenty-five states offer these exemptions for solar energy. For example, Arizona provides a sales tax exemption for both the retail sale and installation of solar energy devices. In Colorado, the state’s sales and use tax exemptions cover all sales, storage, and use of components used to produce alternating current electricity from renewable energy sources, including those in solar thermal systems.
The Significance of Tax Exemptions in Signaling State Commitment
Solar tax exemptions serve not just as financial incentives but also as indicators of a state’s commitment to facilitating a smoother transition to solar energy for homeowners. This dedication often leads to other encouraging programs. According to data from solar panel calculators, states with solar tax exemptions have installations that pay off almost two years faster than states without these exemptions.
Disclaimer: The information presented in this article is meant to offer a general understanding of the tax credit exemptions for homeowners considering solar installations. However, it should not be taken as official financial advice. If you are seriously contemplating installing solar products, we recommend using your best judgment and consulting with a qualified tax professional to ensure you make informed decisions based on your specific circumstances.
