Federal Solar Tax Credit (ITC) Guide

What Is the Federal Solar Tax Credit?

The federal solar Investment Tax Credit (ITC) is the single most valuable incentive for homeowners going solar. It allows you to deduct 30 percent of the total cost of your solar energy system from your federal income taxes. If your system costs $18,000, the ITC saves you $5,400.

The Inflation Reduction Act of 2022 extended and expanded the ITC, locking in the 30 percent rate through 2032. This gives homeowners a generous window to plan and execute their solar projects without worrying about the credit disappearing.

ITC Timeline and Phase-Down Schedule

Understanding the schedule is important for planning your investment:

2022 through 2032: 30 percent tax credit

2033: 26 percent tax credit

2034: 22 percent tax credit

2035 and beyond: The residential credit is scheduled to expire (0 percent) unless Congress extends it

The credit applies to the year your system is placed in service, meaning the year it is fully installed and operational. If you sign a contract in 2026 but the system is not completed until 2027, you claim the credit on your 2027 tax return.

Who Qualifies for the Solar Tax Credit?

The ITC is available to most homeowners who install solar panels on their primary or secondary residence. Here are the eligibility requirements:

You Must Own the System

The tax credit is only available if you purchase your solar system outright or finance it with a solar loan. If you lease solar panels or enter a power purchase agreement (PPA), the third-party owner claims the credit instead.

You Must Owe Federal Income Taxes

The ITC is a tax credit, not a refund. It reduces the amount of federal income tax you owe dollar for dollar. If you owe $4,000 in federal taxes and have a $5,400 tax credit, you eliminate your $4,000 tax bill and carry the remaining $1,400 forward to the next tax year.

The System Must Be New

The ITC applies to new solar panel installations. Used or previously installed panels do not qualify. However, if you buy a home that already has a solar lease, the lease transfers to you but you cannot claim the ITC.

It Must Be at Your Residence

The solar system must be installed on your primary or secondary home located in the United States. Rental properties where you do not reside are not eligible for the residential ITC, though a separate commercial ITC may apply.

Residential rooftop equipped with solar panels - Federal Solar Tax Credit (ITC) Guide

What Costs Are Eligible?

The ITC covers a broad range of costs associated with your solar installation:

Solar panels: The panels themselves are the largest eligible expense.

Inverters: Whether you choose a string inverter, microinverters, or power optimizers.

Racking and mounting equipment: All hardware used to attach panels to your roof or ground mount.

Balance of system: Wiring, conduit, junction boxes, and other electrical components.

Labor costs: Installation labor for all components.

Permitting and inspection fees: Costs required by your local jurisdiction.

Sales tax: Any sales tax paid on eligible components.

Battery storage: As of the Inflation Reduction Act, standalone battery storage systems with a capacity of 3 kWh or more also qualify for the 30 percent credit, even without solar panels.

Energy storage systems: This includes the Tesla Powerwall, Enphase IQ Battery, and similar products.

How to Claim the Solar Tax Credit

Step 1: Keep All Documentation

Save your contract, invoices, receipts, and proof of payment. Your installer should provide a detailed breakdown of costs. You will also need a certificate of completion showing when the system was placed in service.

Step 2: Complete IRS Form 5695

When filing your annual federal income tax return, complete IRS Form 5695 (Residential Energy Credits). This form calculates your credit amount and carries it to your Form 1040.

Step 3: Carry Forward if Needed

If your tax credit exceeds your tax liability for the year, the unused portion rolls forward to future tax years. There is no limit on how many years you can carry the credit forward, giving you flexibility even if your tax bill is relatively small in any given year.

Solar panels generating clean energy under blue sky - Federal Solar Tax Credit (ITC) Guide

Maximizing Your ITC Savings

Pair Solar with Battery Storage

Since battery storage now qualifies for the 30 percent ITC independently, adding a battery to your solar system can increase your total credit significantly. A $10,000 battery adds $3,000 to your tax credit.

Include All Eligible Costs

Make sure your installer itemizes every eligible cost. Some homeowners miss out on credits for items like electrical panel upgrades that are required for the solar installation, sales tax, and permitting fees.

Consider Your Tax Situation

If you know a year where your tax liability will be particularly high, such as a year when you sell stock or receive a bonus, that may be an ideal year to claim the credit. Work with a tax professional to plan accordingly.

Common Mistakes to Avoid

Confusing a tax credit with a tax deduction: A $5,400 credit reduces your taxes by $5,400. A $5,400 deduction would only reduce your taxes by roughly $1,200 to $1,900 depending on your bracket. The ITC is a credit, which is far more valuable.

Forgetting to carry forward: If your credit exceeds your tax bill, you do not lose the excess. Make sure you carry it forward on next year's return.

Claiming the credit on a leased system: Only system owners are eligible. If you lease, the leasing company benefits from the ITC.

Not keeping proper records: The IRS may request documentation supporting your credit claim. Maintain organized records.

Family standing by house with rooftop solar panels - Federal Solar Tax Credit (ITC) Guide

The Bottom Line

The 30 percent federal solar tax credit is one of the most generous clean energy incentives ever offered to American homeowners. Combined with state and local incentives, it can reduce the cost of going solar by 40 to 60 percent.

With the credit locked in through 2032, there is no immediate rush, but electricity rates continue to climb. Every month you wait is another month of full-price electricity bills. Get a free quote through SmartEnergyUSA to see exactly how the ITC and other incentives apply to your specific situation.