Your Ultimate Guide to the Federal Solar Tax Credit
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Solar panels can save you money on your electric bills and reduce your carbon footprint, but they’re expensive to install. Fortunately, the U.S. government offers a federal solar tax credit to make the transition to solar more affordable.
In this article, we detail what the federal solar tax credit is, how to use it, and other tax credits you can take advantage of.
What Is the Federal Solar Tax Credit?
The federal solar tax credit, also known as the solar Investment Tax Credit (ITC), allows you to reduce your federal taxes by up to 30% of your solar panel installation costs. The policy was introduced as part of the Energy Policy Act of 2005 and was initially set to expire in 2007. However, Congress has extended the policy multiple times, giving homeowners more time to take advantage of the deduction.
The ITC policy has remained the same since its introduction, but the rate has fluctuated. It was set at 30% from 2016 to 2019, but reduced to 26% in 2020 and was set to remain at that rate for the remainder of 2022.
In August 2022, Congress passed the Inflation Reduction Act, which included an extension of the ITC. The 30% credit is available through 2032. The ITC will drop to 26% in 2033 before reducing to 22% in 2034. It will end in 2035 unless Congress renews it again.
You can also claim the credit for stand-alone solar batteries with a minimum of 3 kilowatt-hours (kWh) of capacity. The battery does not have to be directly tied to a solar panel system to qualify.
How Does The Federal Solar Tax Credit Work?
The ITC works be reducing your owed federal taxes. Note that it’s a tax credit, not a tax refund. The difference is that a tax refund is paid out to you, while a tax credit reduces the amount of taxes you owe. If the taxes you owe are less than your federal solar tax credit, the Internal Revenue Service (IRS) will not refund you for the cost. Instead, the deduction will roll over to the next tax year.
Do I Qualify for the Federal Solar Tax Credit?
The ITC is available for solar customers throughout the United States. However, the federal government outlines specific qualifications that must be met to take advantage of the tax credit. Before applying for the solar investment tax credit, make sure you meet the following qualifications.
You Must Install Your New Solar Power System In the Qualifying Tax Year
You must complete your solar panel installation within the qualifying time period. Homeowners have until Dec. 31, 2032 to receive the 30% tax credit. Otherwise, you will receive 26% in 2033 and 22% in 2034.
The system must also be new or being used for the first time during the specific tax year. You cannot qualify for the deduction with a pre-owned solar system. For example, if you purchased a home with a pre-installed solar energy system, you’re not eligible for the ITC.
You Must Own Your Solar System
Solar power companies typically offer up to four financing choices: full purchase, loan, lease, or power purchase agreement (PPA). You only own your solar system if you buy it at full price or take out a loan. If you choose to lease your system or agree to a PPA, your solar company retains ownership of the system.
You must own your solar system to qualify for the federal solar tax credit. Make sure to choose either the up-front purchase or a solar loan if you want to take advantage of this incentive.
You Must Install the System at Your Primary or Secondary Residence
The solar equipment must be used at either your primary residence or secondary home in the United States. The following types of homes qualify for the deduction:
- Mobile home
- Manufactured home
- Cooperative apartment
Rental properties cannot be claimed for the ITC unless you live there for part of the year and rent out the property whenever you aren’t residing there. However, you can only claim the credit for the amount of time that you live at the property. For example, if you only live at the rental property for six months, you qualify for 50% of the deduction (equivalent to six out of 12 months) versus a 100% deduction (equal to 12 out of 12 months).
For information on whether you qualify in more specific circumstances, such as if you’re not a homeowner or you use part of your home as an office or commercial space, visit the Department of Energy’s website.
What’s Covered Under the Solar Investment Tax Credit (ITC)?
The ITC applies to the total cost of the system, labor, and any additional equipment that supports the system. The following equipment meets the eligibility requirements:
- Solar photovoltaic (PV) panels or PV cells
- Labor costs for the preparation and installation of your solar PV system, including permits, developer, and inspection fees
- Solar storage devices charged by the PV system
- Additional equipment that supports the solar system, including mounting equipment, inverters, and wiring
- Sales taxes on qualified expenses (when applicable)
How Do I Calculate My Federal Solar Tax Credit?
To calculate your federal solar tax credit, simply multiply your total solar installation cost by the ITC’s current rate—in this case, 0.3.
For example, if you spent $20,000 on your solar system, you can claim $6,000 on your federal taxes ($20,000 x 0.3). If you owe $16,000 on your federal taxes, this would reduce your owed tax to $10,000. If you owe $4,000 on your federal taxes, this would reduce your owed taxes to $0. The remaining $2,000 in credit would roll over to the next tax year.
How Do I Claim the Federal Solar Tax Credit?
Homeowners will need the necessary tax forms to receive the ITC. The IRS provides detailed instructions for completing the tax form on its website. Below is a general overview of the steps to file*:
- Use IRS Form 5695 when you file your federal tax returns.
- You will complete Part 1 of the form to calculate your renewable energy tax credit. Keep your receipts for your solar system project and enter the information accurately.
- Enter the amount of your tax deduction on your 1040 form.
*We are not a professional tax service provider or preparer. All information provided is for educational purposes only. Please consult a tax professional for tax advice about your federal income tax preparation. You can also contact the IRS directly for any additional information.
Solar Tax Credits and Incentives by State
The ITC isn’t the only incentive available to homeowners. There are additional tax credits, rebates, and incentives at the state, city, and municipality levels. However, availability varies by state. You can learn more about solar incentives specific to your state by following the links below, or by visiting the Database of State Incentives for Renewables and Efficiency (DSIRE) website and entering your ZIP code.
- Arizona Solar Incentives
- California Solar Incentives
- Colorado Solar Incentives
- Florida Solar Incentives
- Illinois Solar Incentives
- Maryland Solar Incentives
- Massachusetts Solar Incentives
- Nevada Solar Incentives
- New Jersey Solar Incentives
- New York Solar Incentives
- Pennsylvania Solar Incentives
- Texas Solar Incentives
Here’s an overview of other incentives you may qualify for:
Solar Renewable Energy Certificate
A Solar Renewable Energy Certificate (SREC) is a state incentive program that rewards you for the energy your system produces. After registering your system with the state program, you will receive SRECs based on a threshold of kilowatts produced. Homeowners can sell SRECs to utility companies or individuals for profit, but those funds are considered taxable income.
The Renewable Energy Portfolio Standard Program in Washington, D.C., is an example of this type of state incentive.
State Government Rebates
Some local governments offer rebates to encourage residents to transition to solar power. These one-time payments are provided for a limited time and do not count as additional income. For example, the Philadelphia Solar Rebate program offers 20 cents per watt based on the size of the residential project.
State Tax Credits
Solar state tax credits provide similar savings to the ITC but on the state level. These credits reduce your state tax liability and vary in amount and availability. New York offers a generous state tax credit of 25% of your system’s total installation cost.
Property value and property tax increase with typical home renovations, upgrades, and additions. However, many states have made an exception for solar panel installations. Homeowners can benefit from the added value of the solar system without the added tax liability.
Utility Company Rebates
Utility companies may offer rebates to offset solar system costs. These vary by company and can be applied directly to your energy bill or be paid directly to you. Check the terms of your utility company rebate for details about the form of payment.
- Alabama Solar Companies
- Alaska Solar Companies
- Arizona Solar Companies
- Arkansas Solar Companies
- California Solar Companies
- Colorado Solar Companies
- Connecticut Solar Companies
- Delaware Solar Companies
- Florida Solar Companies
- Georgia Solar Companies
- Hawaii Solar Companies
- Idaho Solar Companies
- Illinois Solar Companies
- Iowa Solar Companies
- Kansas Solar Companies
- Kentucky Solar Companies
- Louisiana Solar Companies
- Maine Solar Companies
- Maryland Solar Companies
- Massachusetts Solar Companies
- Minnesota Solar Companies
- Mississippi Solar Companies
- Missouri Solar Companies
- Nebraska Solar Companies
- Nevada Solar Companies
- New Hampshire Solar Companies
- New Jersey Solar Companies
- New Mexico Solar Companies
- New York Solar Companies
- North Carolina Solar Companies
- North Dakota Solar Companies
- Ohio Solar Companies
- Oklahoma Solar Companies
- Oregon Solar Companies
- Pennsylvania Solar Companies
- Rhode Island Solar Companies
- South Carolina Solar Companies
- South Dakota Solar Companies
- Tennessee Solar Companies
- Texas Solar Companies
- Utah Solar Companies
- Vermont Solar Companies
- Virginia Solar Companies
- Washington Solar Companies
- West Virginia Solar Companies
- Wisconsin Solar Companies
- Wyoming Solar Companies
Do Other Solar Incentives and Rebates Affect the ITC?
Solar customers can take advantage of other solar rebates, tax credits, and renewable energy certificates in addition to the ITC. While most incentives don’t affect the ITC directly, some may reduce your total installation cost, and thus the amount you report to the IRS on your tax return. For example, utility rebates usually don’t count toward your income tax and are instead deducted from your total solar system installation cost.
Incentives such as renewable energy certificates and state rebates won’t affect the ITC. However, these incentives affect other aspects of your income tax. State government rebates are added to your taxable income but don’t affect the federal income tax credit.
State tax credits reduce the taxes you owe at the state level. However, as your owed state tax amount decreases, the amount of your owed federal income tax increases due to having less state tax to deduct.
Solar Tax Credit Resources
We recommend consulting the following resources for more information about the federal solar tax credit.
The cost of going solar may seem steep, but the federal solar tax credit helps offset some of those expenses. This tax credit, along with other solar incentives, credits, and rebates, can significantly reduce your total solar investment.
Since the ITC has an expiration date, homeowners interested in going solar should take advantage of it soon. Reputable solar energy installers in your area can help to inform you about additional state and local incentives to further reduce costs.
FAQ About the Federal Solar Tax Credit
How many years can I claim the federal solar tax credit?
You can only claim the ITC once on your tax return. However, any unused credits will carry over to the next tax year. For example, if you received $7,000 in solar tax credits but your tax liability was $6,500, you would pay $0 for your owed taxes. Then, the remaining $500 would roll over to the next tax year.
Will the federal tax credit be extended?
Maybe. The federal tax credit was extended in August 2022 as part of the Inflation Reduction Act. The credit increased to 30% and is available until 2032. The credit will reduce to 26% in 2033 before dropping to 22% in 2034. The tax credit will end in 2035 unless Congress extends it again.
Do state rebates affect the federal solar tax credit?
No. One-time state rebates do not affect the federal solar tax credit.
Can I use the federal solar tax credit against the alternative minimum tax?
Yes, the solar tax credit can be applied to alternate minimum tax or federal income tax.
Can I claim the tax credit if I buy a home with solar panels already installed?
You can claim the tax credit if the solar panels are new and the builder has not already claimed the credit. If you buy a resale home with pre-owned panels already installed, you cannot claim the tax credit. Qualifying solar panel installations must be new or being used for the first time.
Is income from solar panels taxable?
Yes, income from solar panels is treated the same as other income and is taxable.
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