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- The federal solar tax credit gives you 30 percent of the cost of your solar system in credit when you file your taxes.
- Many states offer local solar incentives you can combine with the federal tax credit.
- You must own your solar system to qualify for most solar incentives. Consumers who lease solar panels will not qualify.
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Federal solar investment tax credit (solar ITC)
The federal solar investment tax credit, now known as the Residential Clean Energy Credit, runs through 2034 and offers a tax credit valued at 30 percent of the total cost of a solar system.
The federal solar tax credit was created in 2005 to make it easier for property-owners to invest in solar power. It was originally set to expire in 2006, but was extended several times. In 2020, the tax credit amount lowered from 30 percent to 26 percent and remained there through 2021. In 2022, the Inflation Reduction Act extended the tax credit through 2034 and increased the amount back to 30 percent for 10 years, with slight decreases the remaining two years.
Once your solar installation is complete, you can apply for the federal solar tax credit through the IRS. You’ll receive 30 percent of the cost of your solar system as a credit when you file your annual tax return.
How much can I save with the Federal Solar Tax Credit?
The amount you receive through the federal solar tax credit depends on the total cost of your solar system. In 2022, the total installed cost of a solar system in the US was $31,558, according to data from the Lawrence Berkeley National Laboratory, a Department of Energy Office of Science laboratory.
The 30 percent credit for a total system cost of $31,558 equals approximately $9,467. There is no ceiling on the amount you can receive through the federal tax credit, so you can claim the full 30 percent no matter the size or total cost of your system.
What does the federal solar tax credit cover?
The federal solar tax credit, according to the Office of Energy Efficiency and Renewable Energy, covers:
- Solar panel modules or photovoltaic cells
- Labor costs, including onsite preparation, installation, permitting fees, inspection costs and developer fees
- Wiring, inverters and mounting equipment
- Energy storage devices, like solar batteries, with a capacity rating of 3 kilowatt-hours (kWh) or greater (applies only to systems installed after December 31, 2022).
- Sales tax on qualifying expenses
Federal solar tax credit eligibility
Single-family homes, apartments, condominiums, mobile homes and multi-family dwellings qualify for the federal solar tax credit. You can also claim the tax credit if you own a rental property, although you’ll only be eligible if you live there for at least part of the year. The percentage you can claim depends on how much time you live in your rental property each year. For example, if you live in a property for half of the year and rent it the other half, you can claim 50 percent of the credit.
If you lease your system or sign a power purchase agreement (PPA), you will not qualify for the federal tax credit. You must own your system to qualify for the tax credit.
You are eligible for the federal solar tax credit if:
- You installed or will install a functioning solar panel system between January 1, 2006 and December 31, 2034.
- You installed solar panels on your primary or secondary residence, where you live for at least part of the year.
- You own the system and are not renting it through a lease or PPA.
- You invested in a community solar project and the energy it generates is credited against and does not exceed your home’s electricity usage.
- The solar panel system is new or installed for the first time. You won’t qualify if you purchased a house with a solar system already installed.
How to claim solar tax credit
To receive the 30 percent tax credit, fill out and return IRS form 5695 (PDF) after your solar panels have been installed. The IRS provides instructions to help you fill out the form correctly. Once you’ve been approved by the IRS, you will receive your 30 percent savings in the form of a tax credit when you file your annual tax return. If the value of the credit is more than you owe in taxes, you can carry the remaining amount over to the following year until you’ve received the full amount.
Types of solar incentives
There are a few different types of solar incentives available at the federal, state and local levels. Depending on where you live, you may qualify for a number of incentives after investing in solar panels. Here are some of the most common types of incentives available nationwide.
A tax credit impacts how much you owe in federal taxes. You don’t receive a check in the mail or literal cash back when you apply for a tax credit, like the residential clean energy credit. Instead, you receive a percentage or set dollar amount in credit on your federal tax return, reducing the amount you owe in taxes. If your tax burden exceeds the credit, you may receive a refund on the income taxes you paid.
Solar rebates offer an amount of money (usually set in advance) if you purchase a solar system. Rebates are more common at the state, local or installer levels. You can usually qualify for a solar rebate even if you don’t owe anything in federal taxes.
Some states, utilities and solar installation companies offer low-interest loans designed for residents who want to purchase a solar system. These loans help you finance your solar panels, making the initial purchase easier. While you will have a monthly loan payment, these loans come with a lower interest rate.
Solar Renewable Energy Certificates
Solar Renewable Energy Certificates (SRECs) are credits you receive based on the amount of energy your solar panels generate. In some states, public utility companies are required to purchase a set amount of SRECs from consumers to meet renewable energy goals. Depending on where you live, you may be able to sell your SRECs to your utility company in exchange for cash.
Some states offer performance-based incentives (PBIs), which provide solar owners with a set cash amount for every kilowatt-hour their solar system generates.
Property and sales tax exemptions
An installed and functioning solar panel system tends to increase the value of a home, often by as much as $15,000, according to the Office of Energy Efficiency and Renewable Energy. In some states, if you install a solar system, you will be exempt from paying increased property taxes if the amount you owe increased due to the value of the solar panels.
Your state may also offer a sales tax exemption if you purchase solar panels. With this incentive, you will not have to pay a sales and use tax for your solar system (this only applies if you purchase your system instead of leasing).
Net metering is perhaps the most well-known solar incentive available in a number of states. If you own a grid-tied solar system (meaning a system that is connected to the power grid, i.e. not an off-grid system), you can enroll in net metering through your utility.
Net metering lets you send extra energy generated by your solar panels to the power grid in exchange for credits on your electricity bills. Check with your utility to learn the details of net metering in your area.
Solar incentives in top 10 solar states
- Net metering: Legislators in California voted to revise the state’s net metering terms. NEM 3.0 (the new version of net metering) reduces the amount you can receive for sending power to the grid. Homeowners with complete permission to operate applications submitted by April 15, 2023 secured NEM 2.0 rates, which are much more favorable for consumers.
- Property tax exemption: If you install solar panels before the end of 2024, you will be exempt from paying increased property taxes.
- Sales and use tax exemption: Solar panels and other solar equipment are exempt from sales and use tax in California.
- Self-Generation Incentive Program: If you install a solar battery for your home or business, you can qualify for a rebate valued at 15–20 percent of the battery cost.
U.S. solar incentive FAQs
Yes, you can apply for and claim multiple solar tax credits and rebates. The residential clean energy credit, for example, can be combined with state tax credits, meaning you receive credit from both incentives when you file your taxes.
Every incentive has unique qualifications. Check the requirements for each program before applying. The Database of State Incentives for Renewables & Efficiency offers a comprehensive list of incentives by state, including the qualifications for each program. If you lease your solar system, you will not qualify for most solar incentives.
No, you only qualify for the federal solar tax credit (and most state tax credits) if you file a federal income tax return. If the 30 percent tax credit is worth more than you owe in taxes, you can carry over any unused credit the following year.