Solar Tax Credit: What It Is and How to Claim It

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The solar tax credit provides a dollar-for-dollar reduction of the income tax you owe for up to 30% of the costs of purchasing and installing qualifying equipment and systems. 

• Example: If you have $2,000 in qualifying solar expenses in 2025, you can claim a tax credit of $600. If your overall tax liability is $5,000, you can reduce it to $4,400 by applying the credit. 

Launched in 2022, the credit will decrease to 26% in 2033, then to 22% in 2034, until it phases out altogether. 

The government also provides two corporate incentives for the implementation of clean energy, but those are separate from the Residential Clean Energy Credit.

The Investment Tax Credit (ITC) provides a 30% credit that’s similar to the residential credit. Businesses can opt to claim the Production Tax Credit (PTC) instead, which provides a per-kWh tax credit for the first 10 years of a green energy system’s operation.

Who Qualifies for the Residential Clean Energy Credit?

You can usually get the Residential Clean Energy Credit for upgrades to your main home, whether you own or rent it.

It’s also important to note that you can claim the credit only if you own a clean energy system, not if you lease one.

You also can’t claim a clean energy credit on a property that you rent out, or one that you own that is located outside the United States. However, a second home can qualify, even if it is not your primary residence, as long as you live in it for part of the year.

How Much Is the Solar Tax Credit Worth?

There’s no limit on how much you can claim, with the exception of fuel cell properties, which are capped at $500 for each half-kW of capacity. However, your credit is limited to 30% of your qualifying expenses.

Example #1: If the owners of a multi-property complex install $1 million in eligible products, they could receive up to $300,000 as a federal tax credit.

Example #2: A homeowner installs a more typical $22,000 solar panel setup and receives $6,600, or 30% of the cost. 

It’s important to note that the credit is scheduled to phase out over the coming decade. 

Solar Tax Credit Phase-Out Timeline

• 2022-2032: 30% credit
• 2033: 26%
• 2034: 22%
• 2035 and beyond: Credit set to expire unless extended

Note: Policy changes are possible depending on legislation or administrative action.

What Expenses Qualify for the Solar Tax Credit?

Qualifying expenses include:

• Solar panels (electricity systems)
• Solar water heating systems (must meet IRS certification standards)
• Geothermal heat pumps
• Small wind turbines
• Fuel cells (limit applies: $500 per half-kW)
• Battery storage systems (minimum 3 kWh capacity)
• Labor, wiring, piping, and installation costs

Note: Expenses must directly relate to clean energy generation — e.g., solar shingles qualify, but structural roof work typically doesn’t.

How To Claim the Solar Tax Credit (Form 5695)

Once you confirm that your expenses qualify, you can follow these steps to claim the Residential Clean Energy Tax Credit.

1. Gather all receipts for qualifying expenses
2. Complete IRS Form 5695, Part I
3. List each energy category (solar electric, solar water heat, etc.)
4. Use the worksheet to calculate the total credit (line 14)
5. Transfer the final credit to Schedule 3, Line 5 of Form 1040
6. Submit your forms with your tax return

Can You Carry Over Unused Credits?

It’s important to note that you can claim the solar tax credit only in the year when your system is installed. If you miss your window, you lose the credit. If you have excess credit, however, you can roll it over for up to five years after installation.

State and Local Incentives for Solar Energy

In addition to federal tax credits, various state and local governmental entities may also provide their residents with additional tax credits, rebates or incentives, including:

• California: SGIP rebate for solar batteries
• New York: 25% tax credit (up to $5,000) + 15-year property tax exemption + sales tax waiver
• South Carolina: 25% state tax credit (max $35,000 over 10 years) + property tax exemption + net metering
• Other states with solar incentives: CO, MA, MN, NJ, MD, PA, CT, OH, DE, MT

What to Know About the Solar Tax Credit

• The credit covers 30% of solar and clean energy costs through 2032
• Applies to primary residences, second homes, and qualifying battery storage
• Use Form 5695 and Schedule 3 to claim it
• You can carry forward unused credits for up to 5 years

Check state and local programs for additional savings.

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