How Solar Panels Can Earn You a Big Tax Credit

Since 2006, the federal residential clean energy credit, previously known as the investment tax credit, has given owners of a home or commercial solar-energy system a one-time deduction on their federal return.  

That credit can defray a lot of the cost of a rooftop solar-energy setup: A $20,000 solar photovoltaic system is eligible for a 30% deduction. That essentially brings the price down to $14,000.

There are also additional state and local tax incentives that could save you even more money. And with solar panels running between $15,000 and $25,000, every bit helps.

If you're thinking about getting solar panels, now is a good time. The old credit had been set to expire, but in 2022 Congress passed the Inflation Reduction Act, which included an extension of the credit at 30% through 2032.

Here's what you need to know about the federal solar tax credit, including who qualifies for it, what it covers and when it might end.
For more, find out how to finance your solar-energy system, how to estimate solar panels' efficiency and the best way to winterize your solar panels.

What is the federal solar tax credit?

The one-time federal residential solar energy credit lets you claim a portion of the cost of buying and installing a solar energy system on your federal tax return.

How much is the tax credit worth?

The federal residential clean energy credit covers 30% of the total installed cost of a solar panel system through 2032. The credit falls to 26% for systems installed in 2033 and 22% in 2035.
Unless Congress renews the program, it will expire after 2035.

What are the criteria to claim the solar energy credit?

You can claim the credit once toward the original installation of the equipment.
You must own the solar photovoltaic system and it must be located at your primary or secondary residence. (In some cases, an offsite community solar project also qualifies.) If you are leasing solar panels, you don't get the tax break.

There is no maximum amount that can be claimed, though. In addition, if you financed the system through the manufacturer and are contractually obligated to pay for it in full, you can claim the credit based on the full cost of the system.  

You don't even have to be connected to the electric grid to claim the federal solar tax credit, though there are definite financial incentives to being connected.

How do I claim the federal solar tax credit?

To claim the credit, complete and attach IRS Form 5695 to your federal tax return (Form 1040 or Form 1040NR). 

What expenses are covered?

According to the Department of Energy's Office of Energy Efficiency and Renewable Energy, the cost of the panels or photovoltaic cells is covered, as are labor costs for assembly and installation -- including permit and inspection fees, and sales tax on certain expenses.

Energy storage devices that are charged exclusively by the associated solar photovoltaic panels can be claimed, as can balance-of-system equipment, such as wiring, batteries, safety equipment and mounting equipment.
Read on: Are You Eligible for Any of These 13 Tax Credits?

Can I claim the federal solar tax credit for tax year 2022?

Any solar-energy system installed after Jan. 1, 2006, is eligible for the one-time credit.

If your system was installed and generated electricity in your home last year then, yes, you can claim it. But if you buy and install one this year, you'll have to wait until next year to deduct the credit.

Do states offer their own solar energy tax incentives?

Many states offer their own upfront rebates and tax credits that can be used in addition to the federal ITC.

New York's Solar Energy System Equipment Credit, for example, is equal to 25% of your qualified solar energy system equipment expenditures, up to $5,000. 

Ecowatch named New York one of the top 10 states for solar power tax incentives, along with Colorado, Connecticut, Iowa, Maryland, Massachusetts, New Hampshire, New Mexico, New Jersey and Rhode Island.

Even though solar panels increase property values, at least 36 states have property-tax exemptions for solar energy. If you live in one of those states, your real estate taxes won't go up if you add a solar-energy system.

And in many states, solar equipment is exempt from sales tax.

My utility company offers a solar energy rebate. Do I still qualify for the federal credit?

Many utilities offer one-time incentives or ongoing rebates to residents who install solar panels. The performance-based incentive, or PBI, for example, pays you a credit per kilowatt-hour for the electricity that your system generates.

You can still claim the federal solar tax credit but, typically, any utility rebate is deducted first. 

Let's say your utility company gave you a one-time $1,000 rebate on the $20,000 solar photovoltaic system you bought and installed in 2018. You'd qualify for a 30% credit, but it would be off of $19,000 -- and your tax credit would be $5,700.