The federal solar tax credit: all your questions answered
The federal solar tax credit, also known as the Solar Investment Tax Credit, or ITC, is the single most important solar incentive available in the United States. If you install solar panels before the end of 2022, you will receive a tax credit that is equal to 26% of the cost of your solar installation.
The tax credit is applied to your federal income taxes and can greatly reduce, or even eliminate, what you owe! But, there are certain rules and guidelines that govern who can claim the credit.
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The article below contains information about who can claim the solar tax credit, how it works, and what factors might affect your eligibility.
The history of the federal solar tax credit
Technically, there are two different solar tax credits: one for residential installations and one for commercial installations. In most cases people just refer to both of these as the “solar tax credit” or the ITC.
First enacted in 2005 as part of the Energy Policy Act of 2005, the solar tax credit began as a tax credit of 30% of the cost to install a solar panel system.
The tax credit was arranged to expire in 2007, but it’s popularity and success at expanding the solar industry led it to being extended in 2008.
In 2015, the solar tax credit was extended yet again. With this extension, Congress implemented a schedule for the tax credit to “step down” over time. Here’s how the schedule is laid out:
- 2016 - 2019: The tax credit remains equal to 30% of the cost of the solar installation for home and business owners.
- 2020 - 2022: The tax credit falls to 26% of the cost of the solar installation for home and business owners.
- 2023: The tax credit falls to 22% of the cost of the solar installation for home and business owners.
- 2024 and beyond: The federal tax credit expires for residential solar installations. Commercial solar owners can qualify for a tax credit equal to 10% of the cost of the solar system.
How does the federal solar tax credit work?
Until 2023, the solar tax credit is equal to 26 percent of the cost to install a solar system.
For example, a 6 kilowatt (kW) residential solar panel installation in California costs about $16,080. The credit for that system would be 26% of $16,080, or $4,180.
The solar tax credit brings the total cost of installing this system down to just $11,899!
Until 2023, the federal solar tax credit will equal 26% of the cost of installing a solar system before stepping down to 22% in 2023 and expiring completely for residential installations in 2024. After 2023, businesses can receive a 10% tax credit for installing solar panels.
Whether you can claim the full amount of the credit depends on a few factors.
Who is eligible for the federal solar tax credit?
Anyone who pays for a solar panel installation on their home or business they own can claim the solar tax credit, as long as they have tax liability in the year of installation. You must also be the owner of the solar panel system in order to qualify for the solar tax credit. If you choose to get solar through a solar PPA or a solar lease.
Basically, this means if you owe income taxes during the same year of your installation, and you are the owner of the solar panels you qualify for the tax credit.
Keep in mind, you can’t take a credit larger than the amount of taxes you owe, because the ITC is a “non-refundable” tax credit. You can, however, claim the credit over more than one year, and carry any leftover amount forward to the next year.
For more information on what is eligible for the federal tax credit, check out our ITC frequently asked questions guide.
How do you claim the federal solar tax credit?
To claim the residential credit, complete Form 5695 along with Form 1040 when you file your income taxes. The instructions for Form 5695 are fairly easy to follow, and include a worksheet to help you figure out how much of the credit you can claim this year.
Here are links to the two main documents for tax year 2019:
The federal solar tax credit makes solar more affordable
Federal tax incentives like the solar tax credit make solar energy cheaper and more profitable for the average homeowner.
It’s important to note that in order to get the full 26% tax credit, your system must be “placed into service” by the end of 2022. The IRS doesn’t define what “place into service” means, but it’s safe to assume that it’s when your system is fully interconnected and your utility has granted you permission to operate.
This means that going solar now is the best way to guarantee that you’ll get the highest savings possible. Then you aren’t cutting it too close with the federal solar tax credit deadlines.
Check out reviews of solar installers in your area and request a personalized assessment of your property and energy options.
- The solar ITC is a federal tax credit equal to 26% of the costs of a solar installation completed before 2023.
- The tax credit will decrease to 22% for installations completed in 2023 and disappear for residential installations completed in 2024 and beyond.
- Homeowners who pay taxes can qualify for the tax credit when they install solar panels on a home they own, even if it isn’t their main home.
Author: Andrew Sendy | Home Solar Journalist
Andy is deeply concerned about climate change but is also concerned about cost of living pressures on American families. He advocates for solar energy and solar battery storage only to the extent that they make financial sense for homeowners. He is not affiliated with any particular solar company in the United States.