Federal Solar Tax Credit: How Homeowners Can Save 30% on Solar Systems

Discover how the federal solar tax credit can cut the upfront cost of switching to clean energy. Homeowners who install qualifying solar systems may reduce their federal tax liability by 30% for systems put in service during the 2022–2032 window, making it a prime time to consider solar panels and energy storage for your home.

Federal and state incentives for renewable energy help lower net project costs by combining the ITC with rebates, grants, and local programs. The residential solar tax credit can apply to equipment, labor, and other eligible installation expenses, so many homeowners see meaningful savings when they add solar to their homes.

Want a clear next step? Jump to the “Claiming the Federal Solar Tax Credit” section to see how to use IRS Form 5695 and what documentation you’ll need, or download our Form 5695 checklist to prepare your tax filing (see the Forms & Filing section). If you’re planning an installation, get a free solar savings estimate to see how the credit and local incentives lower your total long‑term energy costs.

Key Takeaways

• The federal solar tax credit can significantly lower out‑of‑pocket costs for rooftop and ground‑mounted solar panels.
• Systems placed in service from 2022 through 2032 are generally eligible for the full 30% federal solar tax credit; the rate steps down in later years.
• Qualifying expenses typically include panels, inverters, racking, wiring, labor, and eligible storage equipment.
• Combining federal and state incentives can further reduce the net cost of going solar and shorten the payback period.
• Proper documentation and, when needed, professional tax advice help homeowners maximize the credit and avoid filing mistakes.

Understanding the Federal Solar Tax Credit

The federal solar tax credit—also called the solar investment tax credit (ITC) or the residential renewable energy tax credit—reduces the federal income tax homeowners and businesses owe by a percentage of their qualifying solar system costs. The ITC is a powerful federal solar tax incentive designed to lower the up‑front barrier to adopting clean, renewable energy.

What is the Federal Solar Tax Credit?

The ITC gives a direct tax credit equal to a share of your qualifying system cost. For example, a $20,000 qualifying system with a 30% credit yields a $6,000 federal credit that reduces your federal tax liability dollar‑for‑dollar. Because it’s a credit (not a deduction), it typically delivers larger savings than a deduction of the same amount.

Note: replace the unsourced average savings stat with a verified figure when available (for credibility, cite the Tax Foundation, DOE, or IRS analysis).

The ITC applies to both residential and commercial solar energy systems, though treatment differs for businesses in certain cases. There’s no fixed dollar cap on the residential credit itself—credit size is driven by the qualifying project cost and the applicable percentage in the year the system is placed in service.

How the Solar Tax Credit Works

To claim the credit you must place a qualifying solar system in service and own the system (purchase or financed ownership). Eligible costs generally include panels, inverters, racking, wiring, balance‑of‑system equipment and, for systems placed in service after December 31, 2022, eligible battery storage meeting the capacity threshold. Leased systems typically do not qualify for the homeowner claiming the credit because the lease owner (not the homeowner) is treated as the owner for tax purposes.

The ITC is generally non‑refundable: it can reduce your federal income tax to zero but will not generate a refund for the excess. However, taxpayers can typically carry forward any unused residential credit to the following tax year(s) until it is used (confirm the current carryforward rules and duration on the IRS website or with a tax professional).

Tip: use the formula Net Qualifying Cost = Total Qualified Costs − Non‑taxable Rebates; then Credit = Net Qualifying Cost × Applicable Percentage. Include documentation for each qualifying line item when you file.

Eligibility for the Federal Solar Tax Credit

If you’re a U.S. homeowner, you may qualify for the federal solar energy credit when you install a qualifying solar panel system. The credit helps make residential solar more affordable by reducing federal tax liability for eligible projects. To receive the credit, you must meet a few key rules about ownership, location, and the system’s start‑of‑service date.

Requirements for Claiming the Solar Tax Credit

To claim the federal solar tax credit you generally must:

• Own the system (purchase outright or financed ownership). Leased systems typically do not allow the homeowner to claim the credit because the leaseholder is the tax owner.
• Place the system in service on or before the applicable deadline for the credit percentage (the full 30% rate applies to systems placed in service during 2022–2032; the credit steps down in later years—see the Rate & Timeline section for details).
• Have the system installed at your primary or second residence in the U.S., or participate in an eligible community solar project where you own or subscribe to an eligible portion of the system.
• Use equipment that is new to you (the system must be newly placed in service by the taxpayer claiming the credit).

Always confirm dates and specifics on the IRS website or with a tax professional, because statutory deadlines and program rules can change.

Types of Qualifying Solar Systems

The credit covers a range of technologies and installation types. Common qualifying residential solar systems include:

• Photovoltaic (PV) rooftop and ground‑mounted solar panel systems
• Solar water heating systems (when they produce hot water for use in the home)
• Solar‑powered fuel cells and water pumps when they meet IRS eligibility rules
• Portions of community solar projects where ownership or subscription meets IRS requirements

Because rules for community solar and third‑party ownership can be nuanced, ask your installer or tax advisor whether your project structure qualifies. Use this quick checklist before you hire an installer: ownership confirmed, location eligible (U.S. property), expected in‑service date, and documentation plan for invoices and permits.

For official guidance, consult the IRS Form 5695 instructions and the IRS pages on the residential clean energy credit to confirm current eligibility details.

Federal Solar Tax Credit Rates and Timelines

The federal solar tax credit, commonly called the Investment Tax Credit (ITC), remains one of the largest federal tax incentives encouraging homeowners and businesses to install solar systems. By lowering the effective project cost, the ITC accelerates adoption of clean energy and reduces reliance on fossil fuels.

Current and Future Tax Credit Percentages

Under current law, the ITC provides a percentage‑based tax credit on qualifying project costs. For systems placed in service during 2022–2032, the available credit percentage is 30%, which effectively reduces the net cost of a system by nearly a third before other state or utility incentives. After 2032 the credit steps down according to the schedule below.

The scheduled step‑down is:

• 2033: 26% for residential and commercial projects
• 2034: 22% for residential and commercial projects
• 2035 onward: residential credit expires under current law and the business/commercial credit drops to 10% (subject to legislative change)

Deadlines for Installing Solar Panels

To qualify for a given percentage, your system must be placed in service (that is, installed and ready to operate) during the year tied to that rate—not merely contracted or started. For example, to capture the full 30% federal solar tax credit you must have your system in service between January 1, 2022 and December 31, 2032.

Note: tax law and timelines can change. Confirm the applicable percentage for your project date on the IRS website or with your tax advisor before filing. If you’re scheduling installation, aim to have the system placed in service by the end of the applicable year to lock in that year’s credit percentage.

Qualifying Expenses for the Solar Tax Credit

Knowing which project costs qualify for the federal solar tax credit lets you capture the full value of the incentive and maximize your long‑term clean energy savings. Below are the most commonly eligible expenses and practical notes on documentation.

Solar Panels and Equipment Costs

The credit typically covers the major hardware and balance‑of‑system items required to produce electricity from the sun. Qualifying equipment commonly includes:

• Solar panels and photovoltaic (PV) cells
• Inverters (including microinverters and string inverters)
• Racking and mounting systems (roof or ground)
• Wiring, junction boxes, and other electrical components
• Battery storage devices meeting the applicable capacity rules for systems placed in service after December 31, 2022

Include sales tax, shipping, and handling on qualifying equipment when they are part of the taxable purchase—state rules vary, so confirm with your installer or tax advisor.

Labor and Installation Expenses

Labor and other site work that are necessary to install the system are generally eligible. Typical qualifying labor and service items include:

• Contractor labor for site preparation, assembly, and installation
• Permitting and inspection fees
• Interconnection or utility application fees required for system operation
• Developer or project management fees tied directly to installation

Make sure invoices separately list labor and parts so you can clearly document each qualifying line item for Form 5695 and for your tax file.

Energy Storage and Batteries

Energy storage devices (batteries) are eligible when they meet the statutory capacity and placement rules that apply to your installation year. For systems placed in service after December 31, 2022, many battery systems that meet the minimum capacity requirement qualify as part of the residential credit—check current IRS guidance for the precise threshold and any special rules.

Practical tips:

• Save all invoices and receipts with line‑item detail (equipment model numbers, labor hours, permit receipts).
• Subtract non‑taxable utility or manufacturer rebates from total project cost before calculating the credit (Net Qualifying Cost = Total Qualified Costs − Non‑taxable Rebates).
• If you use any used equipment, confirm IRS rules on “placed in service” and first‑use requirements—some used equipment may qualify if it is being placed in service for the first time by you.

Documenting each qualifying expense and keeping installer paperwork will make completing Form 5695 easier and support your solar energy tax claim. When in doubt, ask your installer for a detailed invoice and consult a tax professional to confirm eligibility for specific line items.

Claiming the Federal Solar Tax Credit

Installing solar reduces carbon emissions and delivers meaningful solar installation tax benefits. Claiming the federal solar tax credit can lower your federal tax liability and improve the payback on your solar investment.

Follow these steps to claim the credit for a qualifying residential solar project on your main or second home in the U.S.

Step-by-step: How to claim the credit

1. Confirm eligibility. Verify you own the system (purchase or financed ownership), the system is placed in service during the year you claim, and the equipment meets IRS qualifying rules.
2. Calculate net qualifying costs. Add qualifying expenses (equipment, labor, permitting, sales tax) and subtract any non‑taxable utility or manufacturer rebates. Net Qualifying Cost = Total Qualified Costs − Non‑taxable Rebates.
3. Compute your credit. Multiply the net qualifying cost by the applicable tax credit percentage for the year placed in service (see Rate & Timeline). Example: $20,000 × 30% = $6,000 federal credit.
4. Complete IRS Form 5695. Use IRS Form 5695 (Residential Energy Credits) to calculate your residential clean energy credit. Enter the result on Schedule 3 (if required) and carry it to Form 1040 with your tax return. Keep copies of all invoices and receipts supporting each qualifying line item.
5. Handle unused credits. The residential credit is generally non‑refundable: it can reduce your tax liability to zero but will not create a refund. Unused credit may typically be carried forward to future tax years—confirm the current carryforward rules on the IRS website or with a tax professional.

Where to file: complete IRS Form 5695 to compute the credit, transfer totals to Schedule 3 (Form 1040) as instructed, then file your tax return. For up‑to‑date forms and instructions, always use the official IRS website.

Example: If your qualifying net cost is $25,000 and the credit is 30%, your federal solar tax credit equals $7,500. If your federal tax liability that year is $5,000, you would use $5,000 of the credit that year and generally carry $2,500 forward (verify carryforward rules for the tax year).

Practical tips: download a Form 5695 checklist before you file (invoice with model numbers, equipment and labor line items, permit receipts, proof of payment, and rebate documentation). If your tax situation is complex, consult a qualified tax professional to ensure you correctly claim the credit and maximize your savings.

Calculating Your Solar Tax Credit Savings

The federal solar investment tax credit (ITC) directly reduces your federal tax bill by a percentage of your qualifying system costs. Knowing how to calculate the credit and estimate your net costs helps you decide whether solar makes financial sense for your home and shows how much you can save with available tax credit incentives.

Examples of Solar Tax Credit Amounts

Use a simple formula to estimate the credit: Credit = (Total Qualified Costs − Non‑taxable Rebates) × Applicable Percentage. Examples at a 30% rate:

Illustration: a $20,000 qualifying project yields a $6,000 federal credit at 30%. If you combine that with state or utility incentives, your net installed cost falls further — remember to subtract any non‑taxable rebates before calculating the ITC.

Carrying Over Unused Tax Credits

The residential ITC is generally non‑refundable, meaning it reduces your federal tax liability to zero but does not create a refund for excess credit. If your credit exceeds your tax liability for the year, you can typically carry the unused amount forward to the next tax year(s). Check current IRS rules or consult a tax professional for how many years you may carry forward credits for your filing year.

Example: If your qualifying net cost is $17,100 and the credit rate is 30%, your federal solar tax credit would be $5,130. If your federal income tax liability that year is $14,279 (average per Tax Foundation data at the time cited), applying the credit reduces your tax liability accordingly and leaves any unused credit to carry forward.

Practical planning tips:

• Try a quick calculator: enter your estimated equipment + labor cost, subtract rebates, then multiply by the expected percentage (30% for systems placed in service during 2022–2032).
• If you expect low federal tax liability, plan to finance or structure the project with that in mind — working with a tax advisor or installer can optimize timing and ownership to maximize tax benefits.
• Keep all invoices, rebate letters, and proof of payment to support the credit on your tax return.

Accurate calculations help you compare payback periods and long‑term savings. If you’d like, use our downloadable worksheet to estimate your credit and net system cost before you sign an installation contract.

Combining Federal and State Solar Incentives

You can lower the net cost of going solar by stacking the federal solar tax credit with state and local incentives. Many states and utilities offer additional solar energy tax deductions, rebates, and grants that reduce your upfront out‑of‑pocket cost and shorten payback time.

State Solar Tax Credits

Some states provide their own tax credits that can be combined with the federal credit, subject to each program’s rules. Program amounts and eligibility vary by state and may change over time—always verify current details before you plan. Examples (verify current caps and rules before relying on these figures):

• Arizona: historic state credit programs have offered percentage‑based credits up to a cap (check state resources for current limits).
• New York: state incentives and tax credits are available in certain programs and may include upfront rebates or tax credits—confirm program limits.

Solar Rebates and Grants

State and utility rebate programs and grants can significantly lower the initial investment. For example, California runs multiple programs (including incentive and storage rebate programs) that target different customer groups and project types. Rebate amounts typically vary by program, utility service area, system size and income level, and may decline as programs reach capacity.

Programs that target low‑income households (such as state DAC‑style initiatives) can offer per‑watt incentives to reduce barriers to installation—again, check local program pages for current terms, budgets and eligibility.

How to combine incentives correctly: subtract any non‑taxable rebates and grants from your total project cost before calculating the federal ITC (Net Qualifying Cost = Total Qualified Costs − Non‑taxable Rebates). That adjusted cost is the base used to compute your federal solar tax credit. Always confirm how a specific rebate is treated for tax purposes—some incentives reduce basis, while others may be taxable or handled differently.

Tip: Use the DSIRE database or your state energy office to find and verify current state and utility incentives in your area.

Because local programs and utility rebates change frequently, contact your installer and check official state or utility pages before you finalize a contract. They can help identify available incentives, explain how they interact with the federal credit, and ensure you don’t miss local opportunities to reduce your net system cost.

Impact of Utility Rebates and Incentives on the Federal Solar Tax Credit

Utility rebates and local incentives can substantially lower your upfront solar cost, but they also affect the base used to calculate the federal solar tax credit. Most non‑taxable rebates and utility incentives must be subtracted from the project price before you compute the ITC, so it’s important to treat them correctly when planning and filing.

Simple rule of thumb: Net Qualifying Cost = Total Qualified Costs − Non‑taxable Rebates/Grants. Then compute the federal tax credit as Net Qualifying Cost × Applicable Percentage. This ensures you don’t overstate the credit on your tax return.

Example calculation: an 8 kW system that costs $20,080 with a $2,500 utility rebate yields a federal credit of ($20,080 − $2,500) × 0.30 = $5,274.

Note the distinction between rebates/grants that reduce your basis (and therefore lower the ITC base) and incentives treated as taxable income or as separate payments—treatment varies. Always check how a specific rebate is characterized by the utility and confirm tax treatment with a tax professional.

Below are illustrative utility incentives (verify current program details and caps directly with the utility—programs change):

• American Electric Power: historic rebate ranges tied to system size (example entries have ranged from $500 to $3,000).
• Austin Energy: has offered residential rebates (example: $2,500) in some programs.
• CPS Energy: has offered performance or savings‑based rebates for water heating and efficiency measures.
• Denton Municipal Electric: has run size‑based incentives in select programs.
• Sunset Valley (Austin Energy service area): has offered per‑watt rebates in some local programs.

Because utility programs differ by service territory and change frequently, do the following before you file:

• Obtain written rebate documentation from the utility showing the rebate amount and whether it is taxable or reduces the project basis.
• Subtract non‑taxable rebates from the total qualified cost before calculating the federal credit.
• Keep invoices and rebate letters with your tax records to support amounts entered on IRS Form 5695.

Finally, consult your installer and a tax advisor to document rebate treatment correctly and ensure your federal solar tax credit is calculated from the correct net basis. If you want a worksheet, use the Net Qualifying Cost formula above to build a simple spreadsheet that subtracts rebates first, then applies the ITC percentage to compute your eligible federal credit.

Federal Solar Tax Credit for Rental Properties and Second Homes

The federal solar tax credit can apply beyond a primary residence—under the right circumstances, owners of second homes and certain rental properties may qualify. Rules differ based on how the property is used, so review these guidelines and consult a tax professional for mixed‑use situations.

Eligibility for Rental Properties

If you own a property that you sometimes occupy and sometimes rent, you may be able to claim a portion of the credit based on personal use. The key factors are ownership, location in the United States, and whether the installed system benefits the portion of the property you personally use.

Examples and rules to consider:

• If you occupy the property part‑time (for example, 6 months a year) and the system serves both your personal use and rental use, you may be able to claim a prorated portion of the residential credit tied to your personal use—document occupancy carefully.
• If the property is fully rented and treated as an investment property, the residential credit generally does not apply; instead, the project may fall under business tax provisions and different incentives (depreciation, business credits) may be relevant.

Before claiming any portion of the credit, document your occupancy dates and consult IRS guidance or a CPA to determine the correct proration and tax treatment.

Claiming the Credit for Second Homes

Second homes that you own and do not rent (vacation homes, cabins) are generally eligible for the residential credit if the system is placed in service and meets other qualifying rules. That means you can typically claim the full credit for a second home, including equipment and installation costs, provided the property is located in the U.S. and you are the system owner.

Key points for second homes:

• The second home must be your residence (not leased during the period you claim the credit).
• The system must be installed and placed in service on the property’s roof or land within the applicable deadline year.
• Keep thorough documentation: invoices, proof of payment, installation date, and any permits.
• If you later rent the second home, consult a tax advisor—changing use can affect prior and future tax treatment.

Because the interaction between personal use, rental income, depreciation and business tax rules can be complex, we recommend consulting a CPA experienced with energy tax incentives before claiming credits for rental or mixed‑use properties. That ensures correct filing and helps you maximize available benefits while avoiding unexpected tax issues.

The Importance of Professional Tax Advice

Claiming the federal solar tax credit can meaningfully lower your project costs, but the rules, filing steps, and interaction with state or utility incentives can be complex. Working with a tax professional experienced in energy incentives can help taxpayers avoid filing errors, document claims correctly, and maximize available savings.

Consulting with a Tax Professional

A CPA or tax advisor who understands residential clean energy credits will:

• Confirm eligibility for the residential credit and whether your project structure (purchase, financed, leased, community solar) qualifies;
• Guide you through IRS Form 5695, Schedule 3, and how the credit flows to your Form 1040;
• Identify state and local incentives you may be missing and advise how those incentives affect your federal credit calculation;
• Advise on timing, carryforward rules, and interactions with business tax treatments if a property is mixed‑use or income‑producing.

Ensuring Proper Documentation

Accurate records make claiming the credit straightforward and auditable. Ask your installer for a detailed invoice and gather the documents below before filing:

• Itemized installer invoice showing equipment, labor, permits, and sales tax;
• Installation completion date and evidence the system was placed in service (photos, utility interconnection approval);
• Model numbers/serial numbers for panels, inverters, and storage devices;
• Proof of payment (bank statements, cancelled checks, credit card receipts);
• Copies of rebate letters or utility incentive documentation (showing amount and tax treatment);
• Financing agreements if you financed the system.

Common mistakes to avoid: failing to subtract non‑taxable rebates before calculating the ITC, relying on a lease structure that disqualifies homeowner claims, and missing carryforward rules. A qualified tax pro can help you check these items and prevent costly errors.

If you don’t already have a tax advisor, look for one who lists energy tax credits as a specialization or who has verifiable experience preparing Form 5695. Consider offering a downloadable document checklist (invoice template + filing checklist) so homeowners can hand a tidy packet to their tax professional—this makes claiming the credit faster and reduces the chance of mistakes.

The Future of the Federal Solar Tax Credit

The federal solar tax credit has driven large growth in U.S. clean energy deployment by lowering the effective cost of residential and commercial solar projects. Because the credit schedule steps down after 2032 and statutory changes require Congressional action, many homeowners and businesses are watching potential policy updates closely.

Advocacy groups, industry associations, and environmental organizations continue to press Congress for extensions or enhancements to the residential credit because doing so could support jobs, expand renewable energy capacity, and help meet climate targets. Any extension or change requires legislation—follow bill tracking on Congress.gov or reputable industry sources to see the latest proposals.

Potential Extensions and Changes

Lawmakers and advocates have discussed several possible paths for the credit’s future. These include:

• Extending the 30% credit beyond the current 2022–2032 window so homeowners have a longer window to claim the full rate;
• Stretching the step‑down schedule over more years to provide a smoother market transition;
• Expanding eligible technologies or raising support for energy storage and low‑income community programs;
• Targeting additional incentives or carve‑outs for underserved or disadvantaged communities to increase equitable access.

What should homeowners do now? If you’re planning an installation and want to lock in the higher credit percentage, schedule your project so the system will be placed in service by the end of the applicable year (placement‑in‑service—not contract date—determines the rate). Because legislation can change, monitor official IRS updates and congressional activities; your installer and tax advisor can help time projects and filings.

Note: quoted industry statements should be sourced and dated. Replace placeholder quotes with verifiable attributions before publication.

Staying informed about policy developments and planning installations with timing and documentation in mind will help homeowners and businesses maximize the benefit of the federal solar tax credit while supporting broader clean energy goals.

Conclusion

The federal solar tax credit remains one of the most powerful incentives available to homeowners and businesses who want to install solar panels and related equipment. By reducing federal tax liability by a percentage of qualifying project costs, the credit can significantly lower your net installation price and improve long‑term savings from clean energy.

Stacked with state and local incentives—rebates, grants, and property tax exclusions—the federal credit can make residential solar far more affordable. If you’re evaluating solar now, factor both the federal federal solar tax credit and local programs into your payback and financing calculations.

Practical next steps: get an installer quote that itemizes equipment and labor, verify local incentives with your state energy office or DSIRE, and plan installation timing so your system will be placed in service during the year that yields your desired credit percentage.

To maximize your benefit, consult a tax professional who knows residential energy credits and collect thorough documentation (itemized invoices, permit receipts, rebate letters, proof of payment, and in‑service date). Proper documentation and expert advice reduce the risk of errors and ensure you capture the full value of available tax credits.

Ready to move forward? Download our Form 5695 checklist and Net Qualifying Cost worksheet to prepare for filing, or request a free solar savings estimate to see how the credit and local incentives apply to your home.

What is the federal solar tax credit?

What expenses qualify for the credit?

How do I claim the federal solar tax credit?

Can I combine the federal credit with state incentives?

What if the credit is more than my tax liability?