What is the federal solar tax credit?

Key takeaways

• The federal solar tax credit can cover up to 30% of the cost of a solar panel system as a credit toward taxes owed.

• Installation services, supplemental equipment, hardware, permits, and other expenses are also covered under the solar tax credit.

• You need to claim eligible expenses on your income taxes to earn the federal solar tax credit.

The U.S. government offers a federal solar tax credit to encourage homeowners to make the switch to renewable energy. We’ve created this brief guide to help you understand what this tax credit is, how it works, and what it can cover. Read on to see how the tax credit affects solar panel costs.

What is the federal solar tax credit?

The federal solar tax credit—known officially as the Residential Clean Energy Credit (RCEC)—is an incentive provided by the U.S. government to offset some of the cost of investing in solar energy equipment. This program, run through the IRS, allows homeowners to claim a portion of the solar panel cost to reduce income tax liability.

How much is the federal solar tax credit?

Currently, the RCEC allows homeowners to claim 30% of the cost of a new solar energy system. However, this credit is scheduled to be scaled back in the near future. Homeowners can claim only 26% of the cost of solar panels that begin service in 2033, and 22% for equipment beginning service in 2034 or later.

How does the federal solar tax credit work?

The RCEC helps pay for solar equipment through a tax credit. Say you paid $30,000 for a new home solar system and are entitled to a $10,000 credit. When you file your taxes for that year, you can claim $10,000 to reduce the amount you owe. 

If you owe less than $10,000 in this example, you can claim up to the amount you owe in taxes and roll over the remaining credit to next year. You can keep rolling over the unused portion of the credit.

The credit can also count toward a refund if you already paid taxes that year. Say you paid $10,000 through your employer throughout the year. You can receive a refund up to the credit amount in this case.

Legislation behind the residential clean energy credit

The Residential Clean Energy Credit was first introduced under the Energy Policy Act of 2005 under the title of the Residential Energy Efficiency Property Credit. This program was set to expire in 2007, just two years later, but received bipartisan support in the federal government and among the American public. As a result, the credit was renewed in both the Energy Improvement and Extension Act of 2008 and the American Recovery and Reinvestment Act of 2009.

The Residential Energy Efficiency Property Credit was renamed to its current RCEC title in 2022 when Congress passed the Inflation Reduction Act (IRA). This version of the program extended the 30% tax credit through 2032 and expanded the list of eligible renewable energy equipment to include energy storage battery packs, including those that are not directly connected to a solar energy system.

What are qualified installation costs?

Qualified installation costs are renewable-energy-related expenses that are eligible for federal tax credits under the RCEC. These include equipment and installation services for a variety of types of renewable energy and exclude expenses that may be related to but are not necessary for using the equipment.

Qualified installation costs (eligible for tax credit)

The list of solar energy equipment and services that can be covered under the RCEC includes:

• Solar panels

• Solar energy support equipment (e.g. wiring, inverters, etc.)

• Mounting and installation hardware

• Energy storage systems (i.e. batteries with a capacity of 3kWh or more)

• Assembly and installation labor costs

• Permit fees

• Consulting fees

• Sales tax

Non-qualified costs (not eligible for tax credit)

You don’t get to claim every expense related to installing solar for the tax credit. Some examples include:

• Off-site energy storage

• Remote solar energy subscriptions

• Extended warranties or service contracts

• Roof repairs or replacements other than those necessary for solar panel installation

• Cosmetic repairs other than those necessitated by solar installation work

• Solar energy systems and installation for properties other than a primary or secondary residence such as rental properties

TL, DR: Based on IRS regulations, the RCEC only covers expenses directly related to the purchase and installation of solar panels and other renewable energy systems for a primary or secondary residence.

Eligibility: How does the IRS verify the solar credit?

You can file IRS Form 5695 to claim the credit. The IRS doesn’t automatically require further documentation to verify eligibility when you or your tax preparer files your return. But we strongly recommend that you keep and file all receipts related to expenses you claim under the RCEC. 

Who knows if you’ll be audited at some point in the future? You may need to provide documentation so the IRS can verify that the expenses you claimed are real, accurate, and eligible for the tax credit. The IRS can also request to see documentation in some cases.

Steps to claim the federal solar tax credit

Claiming a federal solar tax credit under the RCEC program is relatively simple. There are just a few steps you’ll need to follow to ensure you do it properly.
Determine whether your property is eligible. In order to be eligible for the RCEC, your home must meet the following criteria:

• Is a new or existing home

• Located in the United States

• Your primary or secondary residence

Find out if the equipment you want to install is eligible for tax credits. The list of eligible equipment includes:

• Solar electric panels

• Battery storage technology (capacity of 3 kWh or higher)

• Solar water heaters (certified by the Solar Rating Certification Corporation or a comparable entity)

• Wind turbines

• Geothermal heat pumps (complies with Energy Star requirements in effect at the time of purchase)

• Fuel cells

Purchase your equipment. Make sure to keep all receipts—including those for wiring, supplemental equipment, and hardware—in a place where you can easily find them if needed.

Have your equipment installed. Request a formal, itemized invoice from your contractor and keep a copy with your equipment receipts.

Claim your expenses on Form 5695 with your tax return. This is the form the IRS provides specifically for RCEC claims. Be sure to double-check your math before carrying the amount of your claim over to your primary tax form.

Income limit and tax liability factors

There’s no income limit for claiming the federal solar tax credit, or RCEC. Your eligibility depends on the type of solar equipment you purchase and whether it’s installed on a residential or business property—not your annual income. So, homeowners of any income level can claim the RCEC for qualifying solar panel systems and related equipment.

The only way your income matters is when it comes to your federal tax liability. The RCEC works as a tax credit, which means it directly reduces the amount of federal income tax you owe to the IRS. If you owe taxes for the year—whether those are withheld from your paycheck or paid when you file—you can use the RCEC to lower your tax bill. If the credit is larger than what you owe, you can carry forward the unused portion to future tax years.

However, if you owe $0 in federal income tax—for example, if you’re retired and your only income comes from Social Security or tax-exempt investments—you won’t benefit from the RCEC. The credit isn’t refundable, so you can’t use it to get a payment back from the IRS if you don’t owe any taxes.

Other financial considerations

In addition to the federal tax credit, there are other financial incentives and cost factors to consider when going solar:

• Net metering: Many states offer net metering programs that let you earn energy bill credits for excess electricity your solar panels send to the grid. These credits can lower your monthly utility costs and shorten your solar payback period.

• Solar energy rebates: Some local governments, utilities, or state energy offices provide cash rebates for installing qualifying solar photovoltaic systems. These rebates can lower your upfront installation costs by hundreds or even thousands of dollars.

• Solar panel financing: Solar loans with good interest rates allow homeowners to install solar with little or no money down. However, we recommend avoiding loans with high rates, along with power purchase agreements and solar leases.

Bottom line on the federal solar tax credit

The federal solar tax credit is a broad incentive program available to all homeowners in the U.S. Known officially as the Residential Clean Energy Credit, the program allows homeowners to claim a credit up to 30% of the cost of a solar panel system to reduce taxes owed. The tax credit could make solar affordable for you. However, carefully consider other things like payback period and energy savings, because solar isn’t best for everyone.

FAQ About the federal solar tax credit

Below are a few frequently asked questions about the federal solar tax credit:

How does the 30% federal tax credit for solar work?

The 30% federal tax credit for solar energy works by allowing homeowners to claim up to 30% of the cost of a solar energy system, including installation and related fees, to reduce taxes owed.

What is the current federal solar tax credit?

The current federal solar tax credit—known officially as the Residential Clean Energy Credit—allows you to claim up to 30% of the cost of a new solar panel system, along with installation, fees, and other related expenses. It is set to reduce to 26% in 2033 and 22% in 2034.

How do I qualify for the 30% solar income tax credit?

You need to claim eligible expenses with Form 5695 to qualify for the federal solar tax credit. You do not need to provide documentation, but you may be asked to provide it in the future if you are audited.

Will I get the solar tax credit if I don't owe taxes?

You can get the credit if you paid taxes through an employer. You’ll receive the applicable portion of the taxes you paid as a refund. However, if you truly owe $0 in income tax (which means you didn’t make income from wages or a salary), you don’t get the tax credit.