Homeowner’s Guide to the Federal Tax Credit for Solar Photovoltaics (PV)
Updated April 2024
Disclaimer: This guide serves as an overview of the federal investment tax credit (ITC) for residential solar photovoltaics. It does not provide professional tax advice or other forms of financial guidance. For additional information, consult the Treasury Department’s official Fact Sheet or seek advice from a tax professional. The guide below should be used in conjunction with advice from professionals when making tax, financial, or purchasing decisions.
What is a tax credit?
A tax credit is a dollar-for-dollar reduction in the amount of federal income tax owed. This is different from a tax deduction, which reduces the amount of income that is subject to tax. For instance, if a taxpayer owes $5,000 in federal taxes and they claim a $1,000 tax credit, their tax liability would drop to $4,000. The federal solar tax credit works this way by reducing the amount of federal taxes you owe based on a percentage of the cost of your solar PV system.
What is the federal solar tax credit?
The federal residential solar energy credit allows homeowners to claim a percentage of the total cost of installing a solar PV system. Currently, the credit stands at 30% for systems installed from 2022 through 2032, due to an extension passed by Congress in August 2022. Before that, systems installed in 2020 or 2021 were eligible for a 26% credit. The credit will decrease to 26% in 2033, then 22% in 2034, and will expire altogether at the start of 2035 unless Congress renews it.
There is no cap on the dollar amount that can be claimed. The tax credit applies to both purchased solar PV systems and some community solar programs (if structured correctly). It also covers both labor and equipment costs related to the installation.
Am I eligible to claim the federal solar tax credit?
To be eligible for the federal solar tax credit, the following criteria must be met:
Time Frame: The system must have been installed between January 1, 2017, and December 31, 2034.
System Ownership: You must own the system. Systems that are leased or part of a power purchase agreement (PPA) do not qualify for the tax credit. If you financed the system through the solar installer, as long as you own the system (even though you’re paying it off), you are eligible.
Location: The system must be installed at a residence in the U.S. This includes primary residences, vacation homes, and off-site community solar systems (if the electricity is credited to your residence and does not exceed your consumption). It is important to note that rental properties do not qualify for this credit unless the system is installed on a portion of the property used by the owner as a residence (e.g., you live in part of a duplex and rent out the other part).
Original Installation: The solar PV system must be new or used for the first time. Tax credits are only available for the original installation.
What expenses are included in the federal solar tax credit?
The following expenses can be included in your calculations for the tax credit:
Solar PV panels or PV cells used to generate electricity, including those integrated into solar roofing tiles or shingles that serve both electricity-generating and roofing functions.
Labor costs associated with the onsite preparation, assembly, and installation of the system. This includes permitting fees, inspection costs, and any developer fees.
Balance-of-system equipment, such as wiring, inverters, and mounting equipment, required to support the function of the solar panels.
Energy storage devices with a capacity of at least 3 kilowatt-hours (kWh) or more, if installed with the solar system or added later (starting January 1, 2023). This could include solar batteries, like the Tesla Powerwall or similar systems. It’s important to ensure that the energy storage meets the kWh threshold.
Sales taxes on eligible expenses.
Example Calculation:
Let’s say you installed a solar PV system in 2023 for $20,000, which includes labor and equipment costs. In this case, the federal tax credit would be:
This means you can reduce your federal tax liability by $6,000 for that tax year. If your tax liability is less than $6,000, the remaining credit can be carried over to the following year.
How do utility rebates and other incentives impact the federal tax credit?
While federal law often excludes utility rebates from being taxed, they do reduce the overall cost of your solar PV system when calculating the federal tax credit. For example, if your solar system cost $18,000 and your utility offers a $1,500 rebate for solar installation, your tax credit would be calculated as follows:
However, net metering credits (payments for excess energy sent back to the grid) do not count as rebates and do not affect your tax credit. Similarly, payments you receive for selling Renewable Energy Certificates (RECs) are taxable as income but do not reduce your tax credit.
Rebates from state governments:
Unlike utility rebates, state government rebates generally do not reduce the federal solar tax credit. You would still calculate your tax credit based on the full system cost, regardless of state rebates. However, state tax credits might affect your federal tax return because they reduce your state tax liability, which can impact your state and local tax (SALT) deduction on federal returns.
Can I claim the credit if…
I’m not a homeowner?
Yes, if you’re a tenant-stockholder in a cooperative housing corporation or a member of a condominium association, and you contributed to the cost of a solar PV system for the building, you can claim the tax credit. However, renters whose landlords installed the solar system cannot claim the credit.
I installed solar PV on my vacation home?
Yes, you can claim the tax credit as long as the solar system is installed on a residential property you own. The home does not need to be your primary residence, but it cannot be a rental property.
I’m not connected to the electric grid?
Yes, a solar PV system that is off-grid still qualifies for the tax credit, provided the system generates electricity for your residence.
The panels are on my property but not my roof?
Yes, as long as the panels are installed somewhere on your property and generate electricity for use at your home, the system is eligible for the tax credit.
Can I finance my solar system and still claim the tax credit?
Yes. If you finance your solar PV system through a loan, you can still claim the federal solar tax credit based on the full cost of the system. However, any interest you pay on the loan, financing fees, or extended warranties are not eligible expenses for the tax credit.
What if I participate in a community solar program?
If you’re part of a community solar program where you purchase an interest in the system, and the electricity is credited to your home, you may still qualify for the tax credit. However, this can be complex due to IRS rules regarding “passive investments.” In general, homeowners who participate passively in a community solar project (i.e., you are not materially involved in its operation) may only claim the credit against passive income, such as rental income, which most homeowners do not have.
What happens if my tax credit exceeds my tax liability?
The federal solar tax credit is nonrefundable, meaning you won’t get a refund if the credit exceeds your tax liability. However, you can carry over the unused portion of the credit to the next tax year. For instance, if you install a solar PV system in 2024 and your tax liability is $4,000 but your credit is $6,000, you can use the remaining $2,000 credit in 2025.
Frequently Asked Questions:
Is there a dollar limit on the federal solar tax credit?
No, there is no dollar limit. You can claim 30% of all eligible expenses with no cap.
Is a roof replacement eligible for the tax credit?
In most cases, roof replacements are not eligible unless you install solar roofing tiles or solar shingles that generate electricity as part of the system.
How to claim the federal solar tax credit:
You can claim the federal solar tax credit by filing IRS Form 5695 with your federal tax return. Be sure to consult a tax professional to ensure you meet all the eligibility requirements.
For more detailed advice and official guidance, consult the IRS’s published materials or speak with a tax professional.
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