You may reduce your federal income tax through a solar investment tax credit, but it is not a refund in the traditional sense

A solar investment tax credit (ITC) lets you subtract a percentage of what you paid for a solar system directly from your federal income tax bill. The current federal credit covers 30% of your installation costs through 2032, then steps down to 26% in 2033 and 22% in 2034. This is different from a refund: a refund is money the government sends you because you overpaid. A tax credit reduces what you owe in the first place.

If you install a 6-kilowatt residential solar system that costs $18,000, the 30% credit is $5,400. That $5,400 comes off your tax bill for the year you installed the system. If you owe $7,000 in federal income tax that year, you now owe $1,600. If you owe $3,000, you now owe nothing—but you do not get the remaining $2,400 as a refund under current rules.

Some states offer their own solar credits or rebates on top of the federal credit. These vary by location and change year to year. A few states allow unused federal credits to carry forward to future tax years, which means you can use the credit even if you do not owe enough tax in the installation year. Check your state's tax authority website or ask your solar installer what applies where you live.

Key Takeaways

  • The federal solar investment tax credit is 30% of installation costs and reduces your tax bill dollar-for-dollar, not a refund you receive.
  • You must own the solar system outright or through a loan to claim the credit; leased systems and power purchase agreements do not may have access to.
  • The credit applies to the tax year when the system is installed and operational, and some states let you carry unused credit forward to future years.
  • State and local incentives vary widely and may include additional credits, rebates paid upfront, or performance-based payments over time.

Who can claim the federal solar credit

You must own the solar system to claim the federal credit. That means you bought it outright, financed it with a loan, or paid through a home equity line of credit. If you lease the system or sign a power purchase agreement (PPA)—where a company owns the panels and you buy the electricity they produce—the credit belongs to the company, not you. Some installers pass savings from the credit to lease customers as lower monthly payments, but you do not claim the credit yourself on your taxes.

The system must be installed on your primary residence or a rental property you own. It must be new or newly refurbished; used systems do not may have access to. The installation must be complete and the system must be operational by December 31 of the tax year you claim the credit.

You do not need to have a certain income level or tax filing status to claim the credit, though you do need to owe federal income tax in the year you install the system. If you owe nothing, the credit does not help you that year—though some states allow it to roll forward.

What costs the credit covers and what it does not

The 30% credit covers the cost of the solar panels themselves, inverters, mounting equipment, wiring, and labor to install them. It also covers battery storage systems installed with the solar panels. The credit does not cover roof repairs needed to prepare for installation, permits and inspections, or the cost of connecting to the grid.

If you paid $18,000 for panels and installation but $2,000 of that went to roof work, the credit applies to the $16,000 solar portion. Some installers bundle these costs together, so ask for an itemized quote that separates solar equipment and labor from any other work.

How the credit works on your tax return

You claim the solar credit on IRS Form 5695 (Residential Energy Credits) and attach it to your federal tax return. The form asks for the cost of the system, the date it was installed, and the address where it is located. You will need documentation from your installer showing the total cost and the date the system became operational.

The credit reduces your tax liability dollar-for-dollar. If you owe $5,400 in federal tax and claim a $5,400 credit, your bill becomes zero. If you owe $3,000 and claim a $5,400 credit, you owe nothing—and under current federal rules, you do not receive the extra $2,400. However, some states allow unused credits to carry forward to the next tax year or even multiple years, so check your state's rules.

If you installed the system partway through the year, you still claim the full credit for that tax year. You do not prorate it based on how many months the system was running.

State and local incentives beyond the federal credit

Many states offer additional credits, rebates, or performance payments. New York offers a state tax credit of up to $5,000 for residential solar. California offers the Solar Equipment Property Tax Exclusion, which exempts the added home value from property tax increases. Massachusetts, New Jersey, and other states have their own programs. Some are credits like the federal one; others are rebates paid upfront by the state or utility.

A few states allow unused federal credits to carry forward. New York, for example, lets you use a federal credit that exceeds your tax bill in future years. Other states do not. Your state's tax authority website or your solar installer can tell you what applies in your location.

Some utilities offer rebates or performance-based incentives separate from tax credits. These might pay you based on how much electricity your system produces. These are not tax credits and do not appear on your tax return; they are direct payments from the utility.

What happens if you sell your home

The solar investment tax credit is tied to the person who installed the system, not the home itself. If you sell your house, the new owner cannot claim the credit you did not use. However, the new owner can claim the credit if they did not own the home when the system was installed and they later make improvements to it.

If you installed solar in 2023 and claimed a $5,400 credit on your 2023 taxes, and then sold the home in 2024, the credit is already claimed and gone. The new owner gets no additional credit from that system. This is one reason to install solar early in your ownership if you plan to stay in the home for several years.

Leased systems and third-party ownership

If you lease solar panels or sign a power purchase agreement, you do not claim the federal credit. The solar company that owns the system claims it. Some companies pass part of the savings to you through lower monthly payments, but you do not file Form 5695 yourself.

Leased systems have their own advantages: no upfront cost, the company handles maintenance, and you may have a may provide electricity rate. But you miss the tax credit. If you own the system outright or finance it, you get the credit. If someone else owns it, they do.

Frequently Asked Questions

Can I get the solar credit as a refund if I do not owe taxes?

Under federal rules, no. The credit reduces what you owe, but does not generate a refund if the credit is larger than your tax bill. Some states allow unused credits to carry forward to future years, so you can use them eventually. Check your state's tax authority to see if this applies where you live.

Do I have to claim the credit in the year I install the system?

Yes, you claim it on the tax return for the year the system is installed and operational. You cannot defer it to a later year. If you install in December, you claim it on that year's return, not the next year's.

What if my solar company goes out of business?

The credit is yours to claim regardless of what happens to the installer. You own the system and the tax benefit. Keep your installation paperwork and cost documentation in case the IRS asks for proof.

Does the credit explore if I finance the solar system with a loan?

Yes. You claim the credit based on the total cost of the system, not what you financed. If the system costs $18,000 and you take a $15,000 loan, the credit is still 30% of $18,000. You are claiming the credit on the full cost, even though you are paying it off over time.

Can I claim the credit if I rent my home?

No. The credit applies only to systems installed on property you own—your primary residence or a rental property you own. If you rent from a landlord, you cannot claim the credit even if you paid for the installation.