What solar equipment counts as a tax deduction
The federal Investment Tax Credit (ITC) lets you deduct 30 percent of the cost of solar equipment from your federal income taxes. This applies to solar panels, inverters, mounting hardware, wiring, and labor to install them on your home. The equipment must be new and installed on your primary residence or a rental property you own.
The 30 percent rate is set through 2032, then drops to 26 percent in 2033 and 22 percent in 2034. After 2034, the credit expires unless Congress extends it. You claim this deduction on IRS Form 5695 when you file your taxes.
Some states and local governments offer additional deductions or rebates on top of the federal credit. These vary by location and change year to year, so check your state's energy office website or ask your installer what programs run in your area.
Key Takeaways
- The federal ITC covers 30 percent of the total cost of solar panels, inverters, wiring, mounting equipment, and installation labor through 2032.
- You claim the deduction on IRS Form 5695 in the tax year the system is installed and operational, not when you buy the equipment.
- The equipment must be new, installed on a property you own, and used to generate electricity for your home or rental property.
- Some states and cities offer additional tax breaks or rebates that stack on top of the federal credit, though these programs change frequently.
- If your tax liability is lower than the credit amount, you can carry the unused portion forward to future tax years.
Solar panels and inverters are the main deductible items
Solar photovoltaic (PV) panels are the core of the deduction. This includes the panels themselves, the inverter (the device that converts DC power to AC power for your home), and all wiring and conduit that connects them. Mounting racks, roof penetrations, and hardware to find the system also count.
Labor to install the system is deductible too. This covers the electrician's time, the roofer's time if the roof needs work to accommodate the panels, and the general contractor's labor. You do not separate out labor costs on the form—you straightforward report the total installed cost and take 30 percent of that.
Battery storage systems installed alongside solar panels are also deductible under the ITC. This includes the battery itself, the battery management system, and the wiring to connect it to your solar array and home electrical panel.
What does not count as deductible
Solar water heaters and solar pool heaters do not may have access to for the federal ITC. These use the sun's heat rather than converting it to electricity, so they fall under a different (and much smaller) tax credit that has stricter limits. Some states offer separate deductions for solar thermal systems, but the federal program does not.
Equipment installed on a property you do not own—such as a solar array on a neighbor's land or a community solar project—does not may have access to. You must own the property where the system is installed. Rental properties you own do count, but your primary residence is the most common scenario.
Used or refurbished equipment does not may have access to. The ITC applies only to new systems. If you buy a home with an existing solar system already installed, you cannot claim the credit retroactively—only the original owner could have claimed it in the year it was installed.
How to claim the deduction on your taxes
You report the solar deduction on IRS Form 5695, titled "Residential Energy Credits." This form asks for the date the system was installed, the total cost, and the address of the property. You attach it to your Form 1040 when you file your federal income tax return.
The system must be installed and operational by December 31 of the tax year you claim it in. If installation finishes in January, you claim the deduction on next year's return. Get a completion certificate or final inspection report from your installer to prove the date the system became operational.
If the 30 percent credit exceeds your federal income tax liability for that year, you do not lose the extra amount. Instead, you can carry it forward to future tax years and claim it when your tax liability is high enough. For example, if your credit is $10,000 but you only owe $6,000 in taxes, you carry the remaining $4,000 forward.
State and local deductions vary by location
Many states offer their own tax credits or deductions for solar installation. New York, Massachusetts, and California have programs that stack on top of the federal credit. Some states offer a percentage deduction similar to the federal ITC; others offer a flat dollar amount per kilowatt installed.
Local utility companies sometimes offer rebates that reduce your out-of-pocket cost before you even file taxes. These are not tax deductions but direct discounts on the purchase price. Check your utility's website or ask your installer whether rebates are available in your service area.
State programs change frequently—some are capped by total dollars available, and once the cap is reached, the program closes until the next fiscal year. Your installer usually knows which programs are currently open and can tell you whether you are in a service area that qualifies.
How the deduction affects your home's resale value
The federal government does not require you to add the solar system's cost to your home's basis for property tax purposes in most states. This means you get the tax deduction without increasing your annual property tax bill. However, a few states do increase property taxes when you install solar, so check your state's rules.
When you sell the home, the solar system typically transfers to the buyer without triggering capital gains tax on you. The buyer may be able to claim a remaining portion of the federal ITC if the system was installed less than four years before the sale, depending on the timing and their tax situation.
Frequently Asked Questions
Can I claim the solar tax deduction if I lease my solar panels instead of buying them?
No. The ITC applies only to systems you own outright. If you lease panels or use a power purchase agreement (PPA), the leasing company claims the credit, not you. You may benefit through lower lease payments, but you cannot claim the deduction yourself on your taxes.
What if my solar installation cost more than my annual tax liability?
You can carry the unused credit forward to future tax years. If your credit is $12,000 but you owe only $8,000 in taxes that year, you claim $8,000 and carry $4,000 to next year. You can keep carrying it forward until the credit is fully used or it expires.
Do I need receipts and documentation to claim the deduction?
Yes. Keep your installer's invoice showing the total cost, a completion certificate or final inspection report proving the system was operational by year-end, and proof of payment. The IRS does not usually ask for these upfront, but you must have them if your return is audited.
Can I claim the solar deduction on a rental property I own?
Yes. Solar systems installed on rental properties you own may have access to for the same 30 percent federal ITC. Report it on Form 5695 just as you would for your primary residence. The system must be used to generate electricity for the rental property.
Does the solar tax credit expire?
The 30 percent credit is set through 2032. It drops to 26 percent in 2033 and 22 percent in 2034, then expires unless Congress extends it. If you are considering solar, the sooner you install it, the higher the credit you can claim.