The Federal Solar Tax Credit: Everything You Need to Know
A comprehensive guide to the 30% federal Investment Tax Credit (ITC) and how it can save you thousands on your solar installation.
The federal solar Investment Tax Credit (ITC) is one of the most powerful incentives available to homeowners considering solar energy. Thanks to the Inflation Reduction Act of 2022, the ITC provides a 30% tax credit on the total cost of your solar installation, and it is available through at least 2032. Here is everything you need to know to take full advantage of this opportunity.
What is the Solar ITC?
The Investment Tax Credit allows you to deduct 30% of the cost of installing a solar energy system from your federal taxes. This is a dollar-for-dollar reduction in your tax liability, not just a deduction from taxable income, which makes it incredibly valuable.
For example, if your solar system costs $25,000, you would receive a $7,500 tax credit. If you owe $10,000 in federal taxes that year, your tax bill drops to just $2,500. If your tax liability is less than the credit amount, you can roll the remaining credit forward to the following tax year.
What Costs Are Eligible?
The ITC covers a wide range of costs associated with your solar installation, including the solar panels themselves, inverters and mounting hardware, battery storage systems (added in 2022), labor costs for on-site preparation, assembly, and installation, permitting fees and inspection costs, and sales tax on eligible equipment.
It is important to note that the credit applies to the total installed cost after any state or utility rebates that reduce your cost basis. However, the credit is calculated before applying any state tax credits, which means you can often benefit from both federal and state incentives.
The ITC Timeline
Understanding the ITC timeline is crucial for planning your solar investment. The current 30% rate is available for systems placed in service from 2022 through 2032. Starting in 2033, the credit drops to 26%, and in 2034 it falls to 22%. After 2034, the residential credit is currently set to expire entirely unless Congress extends it.
This timeline gives homeowners a solid window to plan their installation, but there are good reasons not to wait. Equipment costs may increase, installer availability varies seasonally, and locking in the full 30% credit sooner means enjoying savings sooner.
Who Qualifies?
To claim the federal solar ITC, you must own the solar energy system (leased systems do not qualify, though the leasing company can claim the credit), have it installed on a property you own in the United States (it does not have to be your primary residence), have sufficient federal tax liability to use the credit (or be able to carry it forward), and place the system in service during the tax year you are claiming the credit.
Homeowners, second-home owners, and even businesses can qualify. There is no maximum credit amount for residential installations, and the credit can be applied to both new construction and retrofit installations.
How to Claim the Credit
Claiming the solar ITC is straightforward. When you file your federal tax return, complete IRS Form 5695 (Residential Energy Credits). Enter the total eligible cost of your solar system. Calculate 30% of that cost as your credit amount. Transfer the credit amount to your Form 1040.
We recommend working with a tax professional to ensure you maximize your benefit and handle any carryover correctly. Your solar installer should provide documentation of all eligible costs to support your claim.
Combining Federal and State Incentives
The federal ITC can be combined with state and local incentives for even greater savings. Many states offer their own tax credits, rebates, or performance-based incentives. For example, some states provide additional tax credits of 10 to 25 percent, utility companies may offer rebates of $500 to $2,500, and Solar Renewable Energy Certificates (SRECs) can provide ongoing income.
When you stack federal, state, and local incentives, the effective cost of a solar system can drop by 40 to 60 percent or more, making solar energy one of the best investments a homeowner can make.
Take Action Now
With the 30% federal tax credit available through 2032, there has never been a better time to go solar. Our team can help you understand exactly how much you will save with the ITC and other available incentives. Schedule your free consultation today and get a personalized savings analysis for your home.