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What is the Solar Investment Tax Credit?
The Solar Investment Tax Credit (ITC) is a federal tax credit for consumers who purchase solar panels for their home or business. The ITC credits 26% of the cost of a solar system back to the consumer.
The solar investment tax credit and the decreasing cost of solar panels have made purchasing a home solar system much more affordable in the past decade. However, it’s important to note that the solar ITC – also called the solar tax credit or investment tax credit – is set to expire in 2024 unless Congress renews it.
So, who is eligible for the solar ITC? And how can you apply? Read on to learn more about the solar ITC and how much it could save you.
The history of the Solar ITC
Congress passed the Solar Investment Tax Credit in 2005 as a part of the Energy Policy Act and officially enacted it in 2006. Since then, the solar industry in the U.S. has grown by more than 10,000%, according to the SEIA.
The Solar ITC was initially set to expire at the end of 2007, but Congress has voted to extend the tax credit several times since then. Most recently, Congress voted in December 2020 to extend the Solar ITC at 26% until 2024.
The percentage that a consumer can deduct using the Solar ITC has changed since it was initially passed and will change again in upcoming years. When it was first enacted, the ITC was set at 30%. That amount was lowered to 26% in 2020 when Congress renewed it. In 2023, the Solar ITC is expected to be lowered to 22%. In 2024, residential customers will no longer be eligible for the Solar ITC, although commercial customers can still receive 10% back in tax credits.
Saving with the solar tax credit
The Solar ITC can help to significantly reduce the total cost of a home solar system. The average cost of a solar panel system ranges between $15,000 and $25,000. With this price range in mind, here’s a breakdown of how much the 26% solar tax credit could help you save on a residential solar system.
| Cost of a Solar System | Solar Tax Credit | Cost After Tax Credit | Solar Tax Savings |
| $15,000 | 26% | $11,100 | $3,900 |
| $20,000 | 26% | $14,800 | $5,200 |
| $25,000 | 26% | $18,500 | $6,500 |
It’s important to remember that while the Solar ITC is currently set at 26%, that amount is expected to decrease in coming years. In 2023, it will lower to 22%, meaning the savings from the tax credit will also decrease. If you are considering investing in a home solar system, make your decision before the solar tax credit is lowered or is no longer available to residential customers.
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How the Solar ITC works
If you purchase home solar panels, you are eligible for the federal solar tax credit. This covers several types of homes, including single-family homes, apartments, condos, and mobile homes.
Houseboats and rental properties are also covered under the solar tax credit, as long as you live there for a portion of the year. One thing to note – the amount you can claim from the Solar ITC for a rental home is determined by the percentage of the year that you live in the home. For example, if you live in the home for half of the year and rent it for the other half, you can only claim 50% of the Solar ITC.
You are eligible for the solar tax credit if:
- You purchased a home solar system and it was installed between January 1, 2006 and December 31, 2023.
- You own the solar system – meaning you did not sign up for a solar lease or a solar PPA.
- The solar system is new. You cannot claim the Solar ITC if you bought a house with solar panels already installed.
- The solar system is installed on your primary or secondary home and the home is located within the U.S.
To claim the Solar ITC, there are a few steps you need to complete. Here is a breakdown of how to claim the solar investment tax credit:
- Confirm that you are eligible for the solar tax credit. The U.S. Office of Energy Efficiency and Renewable Energy offers a more detailed look into who is eligible for the tax credit.
- Fill out IRS form 5695. This form confirms that you qualify for the solar tax credit. Following are the documents you will need, including instructions for filling out the form:
- Add your renewable energy credit information to your Form 1040 when doing your taxes. If you hire an accountant to do your taxes, they should be familiar with these forms, so discuss the solar ITC with them. If you are doing your taxes yourself, there are YouTube videos that explain how to fill out form 5695. Online tax software like Turbotax should also have this form available.
FAQs about the Solar ITC
When will the solar investment tax credit expire?
The Solar ITC is currently set to expire for residential customers in 2024. Commercial customers who purchase a solar system after 2023 will still be eligible for the tax credit, which will be set permanently at 10%.
Can I combine the Solar ITC with state and local solar incentives?
Yes. Several states offer solar incentives for residential customers. If there are solar incentives and rebates in your state, you can combine them with the federal tax credit. Visit your state’s solar page – listed at the bottom of this page – to learn more about solar incentives and credits by state.
What is covered under the Solar ITC?
The solar investment tax credits covers the following items:
- The cost of the solar panels
- Labor and installation costs such as fees for permits, inspection costs, and developer fees
- Additional solar equipment, including wiring, mounting, inverters, and solar hardware
- Solar batteries, as long as the batteries get 100% of their power from an onsite solar system
- Sales tax on eligible solar expenses
Will I get a refund if the tax credit exceeds my tax liability?
Because this is a nonrefundable tax credit, you will not get a refund for the amount of the tax credit if it is more than your tax liability. However, any unused amount of the tax credit can carry over into the next tax year. You can read more details about this in the U.S. Office of Energy Efficiency and Renewable Energy’s guide.
Can I claim the Solar ITC if I am not connected to the power grid?
Yes, you are still eligible to claim the solar tax credit if you are not connected to the power grid.
Where can I ask questions about the federal solar investment tax credit?
According to the Office of Energy Efficiency and Renewable Energy, you can ask questions using one of the contact methods below:
- By phone: (800) 829-1040
- By address: Internal Revenue Service (IRS), 1111 Constitution Avenue, N.W., Washington, D.C. 20224