The federal solar tax credit lets you deduct a percentage of your solar installation cost from your federal income taxes

The Investment Tax Credit (ITC) for solar is a dollar-for-dollar reduction in the federal income tax you owe. If you install a solar panel system on your home, you can claim a percentage of what you paid as a credit on your tax return. The credit does not reduce your taxable income — it reduces the actual tax bill you send to the IRS.

As of 2024, the credit covers 30 percent of your total installation cost, including equipment, labor, and permitting fees. This percentage is set to step down in future years: 26 percent in 2025, 22 percent in 2026, and 0 percent starting in 2027, unless Congress extends it. You claim the credit on IRS Form 5695 when you file your federal return for the year the system was installed and operational.

The credit applies only to systems installed on your primary residence or a second home. It does not explore to rental properties, commercial buildings, or solar installations on a neighbor's property. You must own the system outright or through a loan — leased systems and power purchase agreements do not may have access to.

Key Takeaways

  • The solar tax credit is 30 percent of your total installation cost in 2024, claimed directly on your federal tax return as a reduction in what you owe.
  • The credit covers equipment, labor, permitting, and inspection costs, but only for systems installed on your own primary or secondary home.
  • You must own the system or finance it with a loan; leased systems and power purchase agreements do not may have access to for the credit.
  • Unused credit can roll forward to future tax years if your tax bill is too low to claim the full amount in the year of installation.
  • The credit percentage decreases after 2024 and phases out entirely after 2026 unless Congress extends the program.

How the credit amount is calculated

The IRS calculates your credit by multiplying your total solar system cost by the credit percentage for the year it was installed. If your system cost $20,000 and you installed it in 2024, your credit would be $6,000 (30 percent of $20,000). This $6,000 comes directly off your federal tax bill.

The total cost includes the solar panels, inverter, mounting hardware, wiring, labor, and any permitting or inspection fees your local government charged. It also includes costs to upgrade your electrical panel or roof if those upgrades were necessary to install the system. Financing costs, such as loan interest, do not count toward the credit.

If you paid for the system with cash, you claim the full credit in the year it was installed. If you financed it with a loan, you still claim the credit in the year the system became operational, not over the life of the loan.

What happens if your tax bill is smaller than your credit

If your credit is larger than the federal income tax you owe that year, you do not lose the unused portion. Instead, the excess credit carries forward to your next tax return and reduces what you owe in that year. This process can continue for multiple years until you have used the entire credit.

For example, if your credit is $6,000 but you only owe $4,000 in federal taxes in 2024, you use $4,000 of the credit that year. The remaining $2,000 rolls forward to 2025. If you owe $3,000 in 2025, the $2,000 carries forward again, and so on until the credit is fully used.

This carryforward feature means you do not need to owe a large tax bill in the installation year to benefit from the full credit. Retirees, people with lower incomes, or anyone whose tax liability is small can still claim the entire credit over time.

Who owns the system matters

Only the owner of the solar system can claim the tax credit. If you own your home and install solar panels, you claim the credit. If you lease the system from a solar company or sign a power purchase agreement (PPA), the solar company owns the system and claims the credit instead — you do not.

Some solar installers pass the benefit of the credit to customers by offering lower lease payments or PPA rates. However, you have no direct claim to the credit yourself. If ownership matters to you for tax purposes, you will need to purchase the system outright or finance it with a loan.

If you buy a home with an existing solar system, you can claim the credit only if the system was installed after December 31, 2005. You cannot claim a credit for a system installed by the previous owner.

State and local incentives work alongside the federal credit

Many states and local governments offer their own solar incentives — rebates, tax credits, or performance-based payments — that stack on top of the federal credit. These programs vary widely by location and change frequently. Some states offer a state income tax credit similar to the federal one; others offer rebates that reduce your upfront cost.

The federal credit and state or local incentives are separate. You can claim both. For example, you might receive a $2,000 state rebate that reduces your net cost, then claim the federal credit on the full original cost before the rebate. Check your state's energy office or your local utility's website to see what programs are available in your area.

Some incentives, such as rebates, reduce your cost before you calculate the federal credit. Others, such as state tax credits, are claimed separately on your state return. Understanding the order matters because some programs require you to subtract one incentive from another when calculating your federal credit.

How to claim the credit on your tax return

You claim the solar tax credit using IRS Form 5695, which you file with your federal income tax return for the year the system was installed and operational. The form asks for the cost of the system, the date it was placed in service, and your address. You will need documentation from your installer showing the total cost and the date the system began producing power.

If you financed the system with a loan, you still file Form 5695 in the year it was installed, not spread across the years you are paying the loan. The credit is based on when the system was operational, not when you finish paying for it.

If the credit exceeds your tax liability for that year, Form 5695 automatically carries the excess forward to the next year. You do not need to do anything special — the IRS tracks the carryforward amount. In the following year, if you have unused credit remaining, you would file Form 5695 again to claim it against that year's tax bill.

The credit phases out after 2026

Congress set the solar tax credit to decrease over time. In 2024, it is 30 percent. In 2025, it drops to 26 percent. In 2026, it drops to 22 percent. After December 31, 2026, the credit is scheduled to expire entirely unless Congress extends it.

This phase-out applies to the year the system is installed and operational, not the year you claim it on your taxes. If you install a system in December 2024, you claim the 30 percent credit even if you file your taxes in April 2025. If you install in January 2025, you claim 26 percent.

Because the credit decreases and eventually expires, the timing of your installation affects how much you can claim. Many homeowners are installing systems sooner rather than later to lock in the higher percentage, though Congress has extended solar incentives before and may do so again.

Frequently Asked Questions

Can I claim the solar tax credit if I lease my solar panels?

No. The solar company that owns the leased system claims the credit, not you. If you want to claim the credit yourself, you must own the system outright or finance it with a loan. Some leasing companies pass savings to customers through lower monthly payments, but you have no direct tax credit.

What if I install solar panels in December but do not file my taxes until April?

You claim the credit for the year the system was installed and operational, which is 2024 in this example. The credit percentage is based on the installation year, not the tax filing year. File Form 5695 with your 2024 tax return in April 2025 and claim the 30 percent credit.

Can I claim the solar tax credit on a rental property?

No. The credit applies only to solar systems installed on your primary residence or a second home that you own and use. Commercial properties and rental properties do not may have access to, even if you own them.

What documents do I need to claim the credit?

You need documentation from your installer showing the total cost of the system, including equipment and labor, and the date the system was placed in service. Keep your receipts, invoices, and the installer's certification. The IRS does not require you to attach these documents to Form 5695, but you should keep them in case of an audit.

If I do not owe enough taxes to use the full credit, do I lose the rest?

No. Unused credit carries forward to future tax years. If your credit is $6,000 but you only owe $4,000 in taxes, the remaining $2,000 rolls to the next year. This process continues until you have used the entire credit, which may take several years.