Federal Solar Tax Credit Guide for Homeowners (September) (2024) (2024)

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You claim the solar tax incentive as part of your annual federal tax return with the Internal Revenue Service (IRS). Your solar provider can supply the proper documentation and instructions for applying for the credit. Most reputable installers typically provide this documentation along with the quote or contract you sign before installation so you know the value of the credit up front. We have listed the essential steps in claiming the credit below:

1. Download IRS Form 5695 to file as part of your tax return.
2. On Part I of the tax form, calculate the credit. You’ll file your solar system as “qualified solar electric property costs.” So on line 1, enter your total system and installation costs as outlined in your solar contract.
3. Complete the calculations on lines 6a and 6b.
4. On line 14, calculate any tax liability limitations using the IRS’s Residential Energy Efficient Property Credit Limit Worksheet.
5. Complete the calculations on lines 15 and 16. Be sure to enter the exact figure from line 15 on your Schedule 3 (Form 1040), line 5.

If you are filing for the first time, we recommend you consult a tax professional and your solar provider to ensure you correctly claim the ITC.

How Long Will It Take to Be Refunded?

According to data from the Tax Foundation, the average federal income tax in the U.S. is $14,279 per year. For a homeowner currently paying this amount, a 6 kW solar system worth $17,100 would generate a federal tax credit of $5,130. In this case, the system owner would see their income tax reduce to $9,149 and would receive the full benefit of their tax credit within the first year.

If your annual tax payment is not high enough to use the solar tax credit completely in a single year, you can carry over the difference for future tax filings. However, any unused solar tax credits that remain after 2034 will expire.

After installing solar panels, you can claim the tax credit on the IRS filing that corresponds to the year you installed your system. For example, a solar installation completed in June 2024 would generate a federal tax credit that the owner could claim in April 2025.

The Office of Energy Efficiency & Renewable Energy (EERE) states the following criteria to determine federal solar tax credit eligibility:

• Date of installation: You are a U.S. taxpayer who installed a solar system between Jan. 1, 2006, and Dec. 31, 2034.
• Original installation: Your solar project is new. Homeowners can only claim the credit on the original installation of solar equipment, not the repurposing or reuse of an existing system.
• Location: The solar system is located at your primary residence or secondary home in the U.S. You may also claim the federal tax credit for an off-site community solar project if the electricity generated is credited against your home’s electricity consumption without exceeding it.
• Ownership: You own the solar PV system. You cannot claim the credit if you are leasing or in an agreement to purchase electricity generated by the system, including a solar power purchase agreement (PPA).
• Type of residence: Homes, mobile homes, houseboats, condominiums and cooperative apartments are all qualifying residences for the ITC.

Can I Claim the Federal Solar Tax Credit On My Rental Property?

If your solar system installation is on a rental or vacation property that you own, you can only claim the ITC if you live at that property for at least part of the year. Even then, you can only claim the portion of the credit that reflects how much time you spent living there.

For instance, if the solar panel system on your rental property cost $20,000, then the full solar energy tax credit of 30% would be worth $6,000. However, if you live at that property 50% of the time (say six months out of the year), you’d only be eligible for $3,000, or 50% of the full credit value.

Does the Date I Install My Solar Panels Affect How Large My Credit Is?

The year that you install your solar panels can affect how large of a tax credit you earn:

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The following expenses are eligible for the federal solar tax credit, according to the EERE:

• Solar panels: The credit covers solar PV panels or PV solar cells.
• Additional equipment: The credit covers other solar system components, including the balance-of-system equipment and wiring, inverters and other mounting equipment.
• Batteries: The ITC covers storage devices, such as solar batteries. Coverage extends if you install battery storage with your solar system, add batteries to an existing system or install stand-alone energy storage.
• Labor: Labor costs for on-site preparation, assembly or original solar installation are covered. This includes permitting fees, inspection costs and developer fees.
• Sales tax: The credit also covers sales tax applied to eligible expenditures.

According to our 2023 survey of homeowners with solar, respondents paid an average of $15,000 to $20,000 for their solar panel systems. When you factor in the 30% federal solar tax credit, the average cost drops to a range of $10,500 to $14,000. Local and statewide incentives can further reduce the cost of going solar.

That said, the total cost of your solar panel system will vary depending on your system size and provider. Although a larger system will cost more, your tax credit will also be higher.

Tax credits, net metering and tax exemptions are three of the most valuable solar incentives offered on a state or local basis. These incentives can be used in tandem with the 30% federal solar tax credit to increase your savings. You can use the Database of State Incentives for Renewables & Efficiency (DSIRE) to find rebates and state tax credits are available in your ZIP code.

Tax Credits

Some states have a statewide tax credit that you can apply in addition to the federal solar tax credit. These states currently include Arizona, Colorado, Hawaii, Massachusetts, Maryland and New Mexico.

Policies for eligibility and claiming state credits vary, so make sure to look on your local government website and speak with your solar installer to learn more.

Net Metering

A total of 41 states currently require net metering. If you live in one of these states, you can export excess energy generated by your solar panels back to the utility grid for bill credits. Some states, like Idaho and Texas, do not have mandated statewide net metering, but many utility companies still offer a program.

Tax Exemptions

Most states offer property tax exemptions for solar equipment, meaning you won’t have to pay taxes on the value added to your property when you install solar panels. Many states also offer sales tax exemptions for solar equipment. Your solar installer can help you fill out and submit any paperwork required for tax exemptions.

Garrett Nilsen, the deputy director of the U.S. Department of Energy’s Solar Energy Technologies Office, recommends the following when it comes to solar incentives:

“Incentives can vary across the country, so it’s important for homeowners to understand what they’re eligible for on the federal and local levels before going solar. An experienced local installer should be able to assist you in claiming any state and local incentives, as well as the ITC.”

Learn more about the solar incentives offered in your state and how to apply:

Several states offer a separate tax credit for solar panel systems, which residents can combine with the federal tax credit to lower the cost of their solar installation. The list of states with this benefit includes Arizona, Maryland, Massachusetts and New York.

For example, New York offers a solar state tax credit covering 25% of system costs up to a maximum amount of $5,000. If you install an 8 kW solar system for $22,500, you get a state tax credit of $5,000 and a federal tax credit of $6,750. The total incentive in this example is $11,750, which reduces the net cost of the solar installation to $10,750.

Just keep in mind that claiming a state tax credit means you are paying less taxes locally, which increases taxable income reported to the IRS. For example, if you report an extra $5,000 after claiming the New York state tax credit and your federal tax rate is 15%, you would pay an additional $750. However, this amount is minimal when combined with the total tax incentive of $11,750.

Note that the above example is simplified and not intended as professional tax advice. When combining state and federal tax credits for solar panels, we recommend consulting a qualified tax professional for the correct filing procedure.

Installing solar panels is worth it for most homeowners. A solar panel system typically generates clean energy for 25 years or more and saves the average U.S. household $1,346 on energy bills annually.

Although solar is still a significant investment, the cost has decreased by more than 50% over the last decade — and the 30% federal solar tax credit further reduces how much you’ll pay. Many utility companies and state governments also offer solar incentives, including tax credits, rebates and net metering. You can combine these incentives with the federal solar tax credit to maximize your savings.

However, if you live in a state with few solar incentives, you may save less over the lifetime of your panels. Other factors like the climate and your roof’s features can affect whether or not solar is worth it for you. Because every solar array and roof is unique, your solar installer will survey your home to determine if solar panels are suitable for you.

We recommend reaching out to a solar professional today to help you decide if solar is worth the investment.

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