Installing solar panels can be an excellent way to reduce your carbon footprint while also lowering your monthly electric bill. Unfortunately, it also requires upfront costs—potentially tens of thousands of dollars—that make it difficult for some homeowners to afford.
The good news? By taking advantage of the solar tax credit, it’s possible to lower your tax bill, effectively reducing the cost of your solar project. Below, we take a closer look at what the solar tax credit is, how it works, and how much you can potentially save.
What is the solar tax credit?
While it’s commonly known as the “solar tax credit,” the Residential Clean Energy Credit was designed to make a variety of residential clean energy projects—including solar projects—more affordable for homeowners. It applies to the purchase and installation of a variety of clean energy technologies, including:
- Solar electric panels
- Solar water heaters
- Wind turbines
- Geothermal heat pumps
- Fuel cells
- Battery storage technology (beginning in 2023)
It does not, however, apply to any structural work that needs to be done to support solar equipment (for example, a new roof).
The solar tax credit was originally created in 2005 and has been extended a number of times over the years, most recently in 2022 with the passage of the Inflation Reduction Act (IRA).
How does the solar tax credit work?
Once you’ve completed your eligible solar project, you can claim this credit the next time you file your federal income taxes.
Tax credits give you a dollar-for-dollar reduction in your tax bill. If you owe $4,000 in income taxes for the year, for example, and receive a $2,000 tax credit, then your tax bill is reduced by $2,000. This is more powerful than a tax deduction, which reduces your taxable income, but not your actual tax liability.
Is the solar tax credit refundable?
A refundable tax credit is one that not only reduces your tax bill for the year, but which can get your money back if it offsets more than you owe.
Unfortunately, the solar tax credit is non-refundable. If your tax credit is larger than the amount you owe for the year, you won't get the excess back as a part of your refund check. But that doesn't mean you're leaving money on the table. If you don't use all of your tax credit this year, anything left over can be rolled forward for use in future tax years.
Can you claim the solar tax credit more than once?
Yes! You can claim the solar tax credit every year that you complete a qualifying solar project for your home, so long as the credit is still active and available. There is no lifetime or annual limit that you need to worry about running into.
As of right now, that means you can claim the solar tax credit each year through 2034.
How much is the solar tax credit worth?
The solar tax credit is currently equal to 30% of the eligible costs associated with your residential solar project.
Exactly how much you save ultimately depends on the cost of your project. If purchasing and installing solar panels results in eligible costs of $30,000, for example, the tax credit can help you save $9,000 in taxes. If your eligible costs only total $15,000, on the other hand, the credit drops to $4,500. The Department of Energy estimates the average homeowner installing rooftop solar panels will enjoy tax savings of approximately $7,500 if they take full advantage of the credit.
It’s important to note that the credit is designed to shrink over the years. While it is currently set at 30% until 2032, it will then shrink to 26% in 2033 and 22% in 2034, according to the Department of Energy. Congress would have to act to extend the program beyond 2034.
Who qualifies for the solar tax credit?
In order to qualify for the solar tax credit, your project and property will need to meet certain eligibility criteria.
What types of property qualify for the solar tax credit?
You can claim the full solar tax credit on your property as long as it is your primary residence for the majority of the year. This is true whether you own the home or rent it.
Landlords and other people who own a home but do not live in it cannot claim the tax credit.
If you own a second home, you can also claim the solar tax credit on qualified expenses as long as:
- The home is located in the United States.
- You live in it for part of the year.
- You do not rent it out to anyone else.
You cannot, however, claim the credit for a fuel cell for your second home.
What are eligible expenses for the solar tax credit?
Costs directly related to purchasing and installing a rooftop solar system, solar water heating system, or solar storage system qualify for the solar tax credit. In addition to the equipment itself, this includes:
- Contractor labor costs for site preparation, assembly and installation
- Permitting fees, inspection costs
- Supports such as wiring, inverters, and mounting equipment
- Energy storage devices
- Sales taxes on eligible expenses
It’s important to note that you must either own the system yourself or purchase an interest in an off-site community solar project in order to qualify for the tax credit. Alternative financing, like a lease arrangement, does not qualify.
The cost of structural work to support such systems, such as a new roof, cannot be included. However, structural components such as solar roofing tiles or shingles can qualify for the credit, the IRS notes, because they produce electricity.
Is there a solar tax credit income limit?
No, there is no income limit. You can claim the solar tax credit regardless of your income level, so long as the project, expenses, and residence are all qualified.
How to claim the solar tax credit
In order to claim the solar tax credit, complete IRS Form 5695. This form covers all residential energy projects. In completing the form, you'll be asked to provide information about the cost of the project. You'll also need to provide certification from the equipment's manufacturer that shows it is eligible for the credit.
State and local solar incentives
Many, but not all, states offer a variety of similar incentives to encourage homeowners to complete solar and other clean energy projects. Likewise, many utility companies also offer incentives that can make your project more affordable.
That being said, if you do claim state or utility-based rebates and incentives, it may reduce the size of your federal solar tax credit. This will depend on a number of factors, which a tax professional can help you understand.