Federal Solar Tax Credit: Everything You Need to Know

If you’re a homeowner interested in solar power, you may not be aware that the federal government offers a compelling incentive that will offset nearly a 1/3 of the purchase price. This is one of the most valuable solar incentives available, offering a 30% tax credit that can save you thousands of dollars when adding solar panels or a battery to your home. 

Determining how much you can offset with this lucrative tax credit requires relatively simple math. For example, if you install a 6 kilowatt (kW) solar system for $18,000, you would qualify for a $5,400 tax credit on your next IRS filing. If your tax liability isn’t large enough to use the entire credit at once, the remaining balance can be carried forward to future tax years. 

In this article, we’ll explain everything you need to know about the federal solar Investment Tax Credit (ITC) , including what it is, what it includes, who is eligible, and a step-by-step guide on how to apply. 

Disclaimer: This article provides a general overview of the federal solar tax credit for homeowners interested in solar power. It is not intended to replace professional financial advice. For personalized guidance on how the solar tax credit can be best applied to your yearly finances consult with a licensed tax professional. 

Key takeaways: 

• The federal solar tax credit allows homeowners and businesses to claim 30% of a total solar or battery system cost as a tax credit. 
• The tax credit was increased from 26% to 30% in 2022 as part of the Inflation Reduction Act and will remain at that rate until 2033, when it will begin an annual ramp down.  
• Any unused balance from the credit can be rolled over, so if you don't have enough tax liability in the first year to utilize the full 30%, the balance can be rolled over into the4 following year.
• The federal solar tax credit is only available for people who purchased their solar panels with cash or a loan. If you sign a solar lease or PPA, the tax credit goes to the leasing company, rather than the homeowner. 

What is a tax credit?

First it’s important to note that a tax credit is not a rebate. A tax credit is a dollar-for-dollar decrease in the amount of income tax you’ll owe the federal government at the end of the year, while a rebate gives you cash back or lowers your purchase cost. With that said, the solar ITC directly reduce the amount of taxes you owe at the end of the year up to 30% of the value of your solar and/or battery investment. . For example, if you owe $5,000 in taxes and qualify for a $2,000 tax credit, your tax bill would be reduced to $3,000. 

What is the federal solar tax credit?

The federal solar tax credit, also known as the Investment Tax Credit (ITC), is a financial incentive offered by the U.S. government to encourage the adoption of solar energy. This credit allows homeowners and businesses to deduct a percentage of the cost of installing a solar energy system from their federal taxes. 

As of 2024, the tax credit is set at 30% of the total cost of a solar installation, including equipment and labor. If it costs you $20,000 to install your solar system, for example, you’d be eligible for a $6,000 tax credit on your federal tax return. The solar system installation must be completed during the tax year for which you are applying for the credit. . 

There’s no cap on the amount you can claim up to the 30%, and if your tax liability is less than the credit offered, you can roll over the remaining amount to future tax years. This makes the solar tax credit one of the most valuable incentives for making the switch to renewable energy. 

The solar tax credit was initially set to expire in 2022 but, as part of the Inflation Reduction Act, was extended until 2034. The current ITC rate of 30% will remain in place until 2033, when it’s scheduled to decrease to 26%. The year you install your solar power system determines how much you can claim as a tax credit:

See: Are Solar Panels Worth It? A Complete Guide To Help You Decide

How does the solar tax credit work?

The federal solar tax credit is a dollar-for-dollar reduction of your federal tax bill. While you need to owe taxes in order to receive the solar tax credit, there is no income limit. This means all taxpayers in all income brackets can claim the solar tax credit so long as they pay for their solar or battery installation with cash or traditional loan. If you don’t have a large enough tax bill to use up the entire credit, you can rollover the unused amount each year until the tax credit is set to expire in 2035. 

To be eligible for the tax credit, you need to have purchased your solar energy system with cash or through a loan. If you’ve signed a lease or power purchase agreement (PPA), you do not actually own the solar system and cannot claim the credit. 

Similar Reading: Leasing vs Buying Solar Panels – Which is Best For You?

How do I know if I’m eligible for the federal solar tax credit?

If you’re unsure whether you qualify for the ITC, let’s cover the eligibility criteria in more detail below. You can claim the federal solar tax credit if: 

• You installed your solar PV system between January 1, 2017 and December 31, 2034
• The solar system was installed on a residence of yours in the United States
• Your solar system is new or being used for the first time (i.e. it can only be claimed on the installation of new solar equipment and not if you purchased a house with a previously installed system)
• You either: 
  • Own the solar system outright (i.e. you paid with cash or financing, but you are not leasing the system or paying a solar company to use the electricity generated by the system)
  • Bought an interest in an off-site community solar project, if the electricity generated is credited against and doesn't exceed your household's energy consumption.

When can I claim the solar tax credit?

You can claim the federal solar tax credit in the same year that your solar energy system was installed and granted permission to operate (PTO) from your utility grid. Because it can take a few weeks to receive PTO from the utility, you should double-check that your system was installed in the same year that it’s turned on. 

For example, if your solar panels were installed in December 2023 but only started producing electricity in January 2024, you would claim the credit on your 2024 tax return. In other words, the credit applies to the year your system was activated and not the year of purchase or contract signing. 

What does the federal solar tax credit include?

The 30% ITC only applies to certain solar equipment and related expenses. Here’s what’s included in the federal solar tax credit: 

• Solar panels: The cost of the solar photovoltaic (PV) panels or PV cells, which are the core component of your solar energy system. 

• Inverters: These convert the direct current (DC) electricity generated by solar panels into alternating current (AC) electricity which can be used by your home. 

• Mounting equipment: This includes racks, brackets, and other hardware used to attach solar panels to your roof or ground-mounted system. 

• Wiring: All electrical wiring needed to connect the various system components together. 

• Labor costs: All costs related to installation, including permitting fees, inspection costs, and developer fees. 

• Energy storage: This includes solar battery systems rated 3 kWh or higher that store excess energy produced by your solar panels. 
• Sales tax: Sales tax on eligible equipment and labor is also included.

Things that aren’t included in the federal solar tax credit are:

• Tree trimming or removal: Sometimes, tree trimming is required to prevent shading on your solar panels. 
• Roof repairs: Depending on your roof’s age and structural integrity, you may need to make repairs or have your roof replaced before installing solar panels. 

See More: Everything You Need To Know About Solar Inverters

What other solar incentives are there?

In addition to the ITC, there are various other solar incentives you can take advantage of to reduce the cost of installing a solar energy system. These incentives vary by state, utility company, and sometimes even municipality. 

Below is an overview of some other solar incentives you may be eligible for:

• State tax credits: Many states offer their own tax credits for solar installations. These can be used in addition to the federal solar tax credit, helping reduce your overall tax liability even more. In Arizona, for example, you can receive a state tax credit of up to $1,000 for a solar purchase.

• Net metering: Sometimes called net billing, this gives you a credit on your electricity bill for any excess energy your solar system generates and sends back to the grid. This can help further reduce your electricity bill. Net billing rules vary by state and utility. 

• Solar Renewable Energy Certificates (SRECs): In some states, you can earn Solar Renewable Energy Certificates for the electricity your solar panels produce. These work similarly to net billing and allow you to sell excess energy to utility companies and generate additional income. 

• Property Tax Exemption: Some states offer property tax exemptions for solar power systems. This means that installing solar panels won’t increase your property taxes, even though they can add value to your home. 

• Sales Tax Exemption: States like Arizona also offer a sales tax exemption on the purchase of solar energy systems. This means you won’t have to pay state sales tax on solar panels, inverters, batteries, and other components. 
• Local incentives: Some municipalities and local governments provide additional incentives, such as grants or low-interest loans, for solar installations. These programs are often aimed at making solar more accessible to low-income households or promote renewable energy in specific communities. It’s always best to work with a local installer who will be up to speed on local incentives available in your area. 

To get personalized guidance on which federal, state, and local solar tax credits, rebates, and incentives you’re eligible for, get in touch with the team at Sun Valley Solar Solutions for a free, no-obligation consultation. 

Keep Reading: Top Reasons to Go Solar in Arizona

How to claim the federal solar tax credit, step-by-step

Here’s a step-by-step guide on how to claim the federal solar tax credit:

Step 1: Install your solar energy system

Make sure your solar power is installed and fully operational during the tax year for which you want to claim the credit. 

Step 2: Check eligibility

Review the eligibility criteria to ensure you qualify for the ITC. To reiterate: 

• You own the solar energy system 
• You have a tax liability in the year you want to claim the ITC
• The solar system is installed on a residence of yours in the United States
• The solar system is new or being used for the first time.

Step 3: Gather your documentation

Keep all the receipts and invoices related to the purchase and installation of your solar energy system. This includes:

• The cost of solar panels and related equipment
• Labor costs for installation
• Fees for permits, inspections, and consultation
• Costs associated with solar batteries
• Any sales tax you paid on these items.

Step 3: Complete IRS Form 5695 

Download IRS Form 5695 from the IRS website if you wish to file your taxes yourself, or take all your documentation to your accountant to file the form on your behalf. Make sure to let them know that you’ve installed solar panels and want to claim the ITC. 

Step 4: Add to Schedule 3 and Form 1040

After completing IRS Form 5695, you can fill out Schedule 3, which allows you to claim nonrefundable credits such as the federal solar tax credit. When you complete Schedule 3, you can fill out Form 1040, which is the main form used to file your tax return. 

Step 5: File your tax return

Attach the completed Form 5695 to Form 1040, your federal tax return. Submit your return by the filing deadline to claim the credit for that tax year. 

Step 6: Apply unused credit to future tax years

If your tax liability is less than the credit amount, you can carry the unused portion forward to future tax years by filling out the relevant sections of Form 5695 in subsequent years. You can continue to roll this amount over until the credit is fully used or the ITC expires in 2034. 

If you’re unsure about any part of this process, we highly recommend consulting a licensed tax professional who can ensure you’re accurately claiming the credit. 

Take advantage of the federal solar tax credit and switch to solar power today

Switching to solar energy is a smart decision for your home as well as the environment, and the federal solar tax credit makes it more affordable than ever. With the tax credit set to expire in 2035, now is the perfect time to reduce the upfront costs of your installation and start enjoying long-term savings on your energy bills. 

If you’d like to see how solar power can work for you and how much you can expect to save, contact our team for a free, no-obligation consultation. We'll evaluate your energy usage, location, and eligibility for incentives and rebates, then provide you with a cost estimate and initial ROI calculation to see how much you can save with solar. Get in touch with us now and start your solar journey today.