What a solar tax credit actually does
A solar tax credit is a dollar-for-dollar reduction in the federal income tax you owe. If you install a solar energy system on your home, the IRS lets you subtract a percentage of what you paid for the system directly from your tax bill. This is different from a deduction, which only reduces the income the IRS counts—a credit cuts the actual tax amount owed.
The current federal solar investment tax credit (ITC) covers 30 percent of your total installation cost, including equipment, labor, and permitting fees. If your system cost $10,000, you can subtract $3,000 from your federal tax bill. The credit applies whether you buy the system outright, finance it through a loan, or lease it from a solar company—though the rules differ slightly for leases.
You claim the credit on IRS Form 5695 when you file your annual tax return. The credit is available for residential solar installations only, not for commercial properties or rental units.
Key Takeaways
- The federal solar tax credit covers 30 percent of your total installation cost and reduces your federal income tax dollar-for-dollar.
- You claim the credit on Form 5695 when you file your tax return for the year the system was installed and operational.
- If the credit is larger than the tax you owe that year, you can carry the unused amount forward to future tax years with no time limit.
- The 30 percent rate is scheduled to step down to 26 percent in 2033 and 22 percent in 2034, then expire unless Congress extends it.
- You must own the system outright or through a loan to claim the full credit; leased systems have different rules that may limit your benefit.
When you can claim the credit
You claim the solar tax credit in the tax year when your system is installed and operational. If you have the panels installed in June 2024 and they are connected to the grid by December 2024, you claim the credit on your 2024 tax return, filed in early 2025.
The system must be new—you cannot claim the credit for used solar equipment or for systems installed before January 1, 2006. The equipment must also be located at your primary residence or a second home you own; it does not may have access to for rental properties, even if you live in one unit of a multi-unit building.
If you financed the system with a loan, you still claim the credit in the year it was installed, not over the life of the loan. The credit is not reduced by the amount you borrowed.
What happens if the credit is larger than your tax bill
If your solar credit is $3,000 but you only owe $2,000 in federal income tax that year, you do not lose the extra $1,000. Instead, you carry forward the unused $1,000 to your next tax return. You can keep rolling forward any unused credit year after year with no important date—there is no expiration date on the carryforward.
This matters most for people with lower incomes or those who are retired and have little tax liability. A homeowner who owes only $1,500 in taxes can claim $1,500 of the credit that year, then use the remaining $1,500 the following year if they owe at least that much. If they do not owe enough in future years, the credit straightforward waits.
You cannot, however, get a refund for unused credit. The credit can only reduce the tax you owe; it cannot result in a payment from the IRS to you.
How the credit works with leased or financed systems
If you own the system outright or through a loan, you claim the full 30 percent credit yourself. The lender has no claim to it.
If you lease the system or use a power purchase agreement (PPA), the solar company that owns the equipment claims the credit instead of you. The company passes some of that benefit to you through a lower monthly payment, but you do not claim the credit on your tax return. This means you get a smaller total benefit, though your upfront cost is also lower since you are not buying the system.
Some solar companies offer a "solar loan" that lets you own the system while financing it—this is different from a lease. With a loan, you own the equipment and claim the full credit, even though you are still paying off the purchase. Check your contract to confirm whether you own the system or are leasing it.
The credit percentage is stepping down
The 30 percent credit rate is set by federal law and is scheduled to decrease in future years. In 2033, the rate drops to 26 percent. In 2034, it drops to 22 percent. After 2034, the credit expires unless Congress votes to extend it.
This schedule applies to systems installed in those years, not to when you claim the credit on your tax return. A system installed in 2032 qualifies for 30 percent; a system installed in 2033 qualifies for 26 percent. Once your system is installed, the rate that applied in that year is locked in—future rate changes do not affect your credit.
Because the rate is stepping down, some homeowners prioritize installing solar sooner rather than later to capture the higher percentage. However, this is only one factor in the decision; installation costs, local incentives, and your own financial situation matter as much or more.
State and local tax credits
Many states and some cities offer their own solar tax credits or rebates on top of the federal credit. These vary widely by location—some states offer a percentage credit similar to the federal one, others offer a flat dollar amount, and some offer rebates instead of tax credits.
State credits are claimed on your state tax return, not your federal return. You can claim both the federal credit and a state credit for the same system. Some states have income limits or other restrictions; a few states have no additional incentive at all.
Check your state's energy office or your solar installer's website to learn what is available in your area. 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 directly.
What costs are included in the credit calculation
The 30 percent credit applies to the total installed cost of the system. This includes the solar panels themselves, the inverter, mounting hardware, wiring, labor, and permitting and inspection fees. If you paid for a site assessment or engineering study before installation, those costs count too.
The credit does not cover costs that are not part of the solar system itself—for example, a new roof, electrical panel upgrades, or battery storage installed separately. However, if you upgrade your electrical panel as part of making the solar installation possible, that upgrade cost may be included.
If you received a state or local rebate before installation, subtract that rebate from your total cost before calculating the federal credit. The credit applies to what you actually paid out of pocket, not the full sticker price.
Frequently Asked Questions
Can I claim the solar credit if I do not owe federal income tax?
You can claim the credit even if you owe zero tax that year, but you cannot receive a refund for it. The unused credit carries forward to future years indefinitely. If you expect to owe tax in future years, the credit will reduce that liability when it arrives.
What if I sell my house—do I lose the credit?
No. The credit is tied to the year the system was installed, not to ownership of the home. Once you claim it on your tax return, it is yours. The new owner of the house cannot claim the same credit again.
Do I need to report the solar system to my insurance company?
That is an insurance question, not a tax question, but the short answer is yes—most insurers ask you to report home improvements. This does not affect your tax credit, but it may affect your coverage or premium.
Can I claim the credit for a solar water heater or pool heater?
The federal solar investment tax credit covers photovoltaic (PV) systems that generate electricity. Solar thermal systems that heat water or pools have different rules and may not may have access to for the same credit. Check IRS Form 5695 instructions or speak with a tax professional about your specific equipment.
What if my contractor goes out of business after installation?
The credit is not affected by the contractor's status. You own the system and can claim the credit regardless of whether the company that installed it still exists. Warranty and service issues are separate from the tax credit.