The federal government has incentives for homeowners to switch to solar through the solar investment tax credit (ITC), also known as the federal solar tax credit. This credit now lets homeowners claim 30% of their total solar system installation costs as a deduction on their federal taxes.
The ITC will decrease to 26% in 2033 and drop to 22% in 2034. It will end in 2035 unless Congress renews it.
The ITC is not a tax deduction. Instead, it reduces what you owe in taxes. This credit applies to the costs associated with installing a solar photovoltaic (PV) system in that tax year. There is no maximum amount that you can claim from your solar project, however as a practical matter your utility may impose limits on the amount of energy you may backfeed to the utility.
You can claim the federal solar tax credit as long as you are a U.S. homeowner and own your solar panel system. You can claim the credit once; it will roll over to the next year if the taxes you owe are less than the credit you earn. Keep in mind that the credit is a deduction, not a refund.
For example, if you install a solar panel system for $19,000, you’ll owe $5,700 less on your federal tax return. If your tax liability is less than $5,700, the remainder of the credit will roll over and be applied to your federal income taxes the following year.
You claim the solar tax incentive as part of your annual federal tax return with the Internal Revenue Service (IRS). Your solar provider should supply the proper documentation and instructions upon your demand. We have listed the essential steps in claiming the credit here:
- First, download IRS Form 5695 as part of your tax return.
- Then, on Part I of the tax form, calculate the credit. You file your solar system as “qualified solar electric property costs.” Then, on line 1, enter your project’s total costs as written in your solar contract.
- Complete the calculations on lines 6a and 6b.
- On line 14, calculate any tax liability limitations using the IRS’s Residential Energy Efficient Property Credit Limit Worksheet.
Finally, complete the calculations on lines 15 and 16. Be sure to enter the exact figure from line 15 on your Schedule 3 (Form 1040), line 5.
- We recommend that taxpayers consult a tax expert and your solar provider to ensure you are correctly claiming the ITC.
The Office of Energy Efficiency & Renewable Energy (EERE) states the following criteria determines whether you can qualify to claim the federal solar tax credit:
- Date of installation: You installed your solar system between Jan. 1, 2006, and Dec. 31, 2034.
- Original installation: The solar PV system is new. The credit can be claimed only on the original installation of solar equipment and not the repurposing or reuse of an existing system.
- Location: The solar system is located at your primary residence or secondary home in the United States. It may also be used for an off-site community project if the electricity generated is credited against your home’s electricity consumption and does not exceed it.
- Ownership: You own the solar PV system. You cannot claim the credit if you are leasing or in an agreement to purchase electricity generated by the system, including a solar power purchase agreement (PPA).
According to the EERE, the federal solar tax credit covers the following items:
- Panels: The credit covers solar PV panels or PV solar cells.
- Additional equipment: The credit covers other solar system components, including the balance-of-system equipment and wiring, inverters and other mounting equipment.
- Batteries: The ITC covers storage devices, such as solar batteries, charged exclusively by your solar PV panels. It also covers storage devices activated in a subsequent tax year to when the solar energy system is installed. Beginning on Jan. 1, 2023, stand-alone energy storage that doesn’t charge solar panels exclusively will qualify for the ITC credit.
- Labor: Labor costs for on-site preparation, assembly or original solar installation are covered. This includes permitting fees, inspection costs and developer fees.
- Sales tax: The credit also covers sales taxes applied to these eligible expenses.
The federal solar tax credit makes switching to solar a cost-effective and worthwhile investment. We suggest you contact a tax professional for tax advice, as well as the IRS and your solar provider to claim the Solar ITC.
The Inflation Reduction Act (IRA) of 2022 makes the single largest investment in climate and energy in American history, enabling America to tackle the climate crisis, advancing environmental justice, securing America’s position as a world leader in domestic clean energy manufacturing, and putting the United States on a pathway to achieving the Biden Administration’s climate goals, including a net-zero economy by 2050.
As part of the Inflation Reduction Act of 2022 signed into law on August 16, 2022, residential energy efficiency tax credits have been extended through 2032. This information applies to the existing tax credits for 2022. Changes to residential energy efficiency tax credits under the Inflation Reduction Act will become effective starting in 2023. Please bookmark this page, as we will be updating the information here by the end of the year.
Tax credits for residential energy efficiency and those for builders of energy efficient homes were extended retroactively, through December 31, 2022. Tax deductions for energy efficient commercial buildings allowed under Section 179D of the Internal Revenue Code were made permanent under the Consolidated Appropriations Act of 2021.
The tax credits for residential renewable energy products are now available through December 31, 2023. Renewable energy tax credits for fuel cells, small wind turbines, and geothermal heat pumps now feature a gradual step down in the credit value, the same as those for solar energy systems. As of 2021, biomass fuel stoves are included in tax credits for residential renewable energy products.
Federal Solar Tax Credits for Businesses
There is a good, detailed explaination of the new Federal Solar Tax Credits for Businesses.
Homeowner’s Guide to the Federal Tax Credit for Solar Photovoltaics
There is also a good, detailed explaination of the updated Homeowner’s Guide to the Federal Tax Credit for Solar Photovoltaics.
See our simplified homeowner's Federal Solar Tax Credit Guide for Homeowners (2023)