The solar tax credit cuts your federal income tax bill by a percentage of what you paid to install solar panels
The Investment Tax Credit (ITC) for solar lets you subtract a portion of your installation costs directly from the federal income taxes you owe. If you paid $20,000 to install a solar system, the credit reduces your tax bill by a set percentage of that amount. You claim it on your tax return in the year the system is installed and operational.
The credit applies to residential solar panel systems, battery storage paired with solar, and some solar water heating systems. It does not cover portable solar generators or panels installed on a rental property you own but do not live in. The system must be new and installed at your primary or secondary home.
Unlike a deduction, which reduces your taxable income, a tax credit reduces the actual tax you owe dollar-for-dollar. A $5,000 credit means you pay $5,000 less in federal taxes, regardless of your income level.
Key Takeaways
- The federal solar tax credit is currently 30 percent of your total installation costs, and you claim it on your tax return in the year your system is installed.
- The credit applies only to systems you own outright; leased or power-purchase-agreement systems do not may have access to, though the leasing company may benefit instead.
- You must have enough federal tax liability in the year you install the system to use the full credit, though unused credit can carry forward to future years.
- The credit percentage is scheduled to decrease after 2032, so timing affects how much you save.
- State and local tax credits or rebates may also be available and work separately from the federal credit.
What percentage of your costs the credit covers
The federal solar tax credit currently covers 30 percent of your total installation costs. This includes the panels themselves, inverters, mounting equipment, wiring, labor, and permitting fees. The 30 percent rate applies to systems installed through December 31, 2032.
After 2032, the percentage steps down: 26 percent for systems installed in 2033, and 22 percent for systems installed in 2034 and later. After 2034, the residential credit expires unless Congress extends it. Commercial solar installations have a different schedule and different rules.
The credit is not capped at a dollar amount, so a $50,000 system generates a $15,000 credit under the current 30 percent rate. There is no maximum benefit per household.
Ownership and system type matter for may be able to access
You can only claim the credit if you own the solar system outright. If you lease the panels or enter a power-purchase agreement (PPA) where a third party owns the system and you buy the electricity it produces, you cannot claim the credit. The leasing company or PPA provider claims it instead.
The system must be installed at a home you own and live in, or at a second home you own. Rental properties you own but do not occupy do not may have access to. The system must be new; used or salvaged panels do not may have access to.
Battery storage installed with solar qualifies. A standalone battery system not paired with solar does not, though this rule may change. Solar water heating systems that use the sun's heat (not solar panels that generate electricity) also may have access to under the same credit.
How much tax liability you need to use the full credit
To claim the full credit, you must owe enough federal income tax in the year you install the system. If your credit is $8,000 but you only owe $5,000 in federal taxes, you can only use $5,000 of the credit that year. The remaining $3,000 does not disappear — it carries forward to your next tax return.
You can keep carrying forward unused credit year after year until you use it all. This means a household with lower income in the installation year can still benefit from the full credit over time. There is no deadline for using carried-forward credit.
Self-employed people, retirees, and others with lower tax liability in a given year often benefit from this carryforward feature. A tax professional can help you estimate whether you will have enough liability to use the credit in the year you install.
How to claim the credit on your tax return
You claim the solar tax credit on Form 5695 (Residential Energy Credits), which you file with your federal tax return. Your solar installer should provide you with documentation of the total system cost and the date it was installed and operational. Keep this paperwork with your tax records.
You file Form 5695 with your regular 1040 return. If you use tax software, it will walk you through the questions. If you work with a tax preparer, give them the installer's cost documentation and the date the system became operational. The IRS does not pre-approve solar credits; you claim it when you file.
The system must be operational (producing electricity) by December 31 of the year you want to claim the credit. If installation finishes in January of the following year, you claim the credit on next year's return instead.
State and local credits work separately from the federal credit
Many states and some cities offer their own solar tax credits, rebates, or performance-based incentives. These are separate from the federal credit and stack on top of it. New York, California, Massachusetts, and other states have programs that reduce your cost further.
Some programs are rebates you receive upfront or shortly after installation, which lowers your out-of-pocket cost before you even claim the federal credit. Others are state tax credits you claim the same way you claim the federal one. A few states offer performance incentives based on how much electricity your system produces.
Your installer can usually tell you what state and local programs apply to your address. The Database of State Incentives for Renewables and Efficiency (DSIRE) lists programs by state, though you will need to verify current details with your state's energy office.
What happens if you sell your home before using the credit
If you install solar, claim part of the credit, and then sell your home before using the full amount, you can continue to claim the remaining credit on your personal tax returns. The credit stays with you, not with the house. You do not lose it.
The new owner of your home cannot claim the credit for the system you installed. Only the original owner who paid for the installation can claim it. If you sell before the system is installed, you cannot claim the credit at all.
This is one reason to keep your installer's documentation and cost breakdown even after you move. You will need it to file Form 5695 in future years if you are still carrying forward unused credit.
Frequently Asked Questions
Can I claim the solar tax credit if I use a loan to pay for the system?
Yes. The credit is based on the total cost of the system, not how you paid for it. Whether you pay cash, take out a loan, or use a combination, you claim the credit on the full installed cost. The loan itself is a separate financial transaction.
What if my solar system is damaged or stops working after I claim the credit?
You keep the credit. It is not recaptured or reversed if the system fails or is damaged later. If you replace the system entirely with a new one, you may be able to claim the credit again on the replacement, but this depends on the specific circumstances and IRS rules.
Do I have to report the solar tax credit to my state if I claim it federally?
It depends on your state. Some states follow federal tax rules automatically; others require you to report it separately or adjust your state taxable income. Check with your state tax authority or a tax preparer familiar with your state's rules.
Can renters claim the solar tax credit?
No. You must own the system and own the home where it is installed. Renters cannot claim the credit, even if their landlord installs solar panels on the building. The landlord would claim it instead.
What if I install solar panels in two different years?
You claim the credit separately for each installation in the year each system becomes operational. If you add a second system three years after the first, you file Form 5695 again in the year the second system is installed and claim the credit on that system's cost.