How the solar tax credit works
The federal solar tax credit, officially known as the Investment Tax Credit (ITC), is a significant incentive for U.S. homeowners and businesses investing in solar energy systems. As of 2025, the ITC allows taxpayers to deduct 30% of the cost of installing a solar photovoltaic (PV) system from their federal taxes. This credit applies to both residential and commercial installations and is a dollar-for-dollar reduction in the amount of income tax owed.
Key Details of the ITC in 2025:
Credit Percentage: The ITC remains at 30% for systems installed between 2022 and 2032. It will decrease to 26% for systems installed in 2033 and to 22% for systems installed in 2034. The tax credit expires starting in 2035 unless Congress renews it.
Eligibility: To qualify for the ITC, the solar PV system must be installed during the tax year for which the credit is claimed. Both primary and secondary residences are eligible, but rental properties do not qualify. Additionally, you must own the system outright, either through cash payment or financing; leased systems do not qualify.
Covered Costs: The credit applies to the total cost of the solar system, including equipment (panels, inverters, mounting hardware), labor costs for on-site preparation, assembly, installation, and permitting fees. Energy storage devices with a capacity rating of 3 kilowatt-hours (kWh) or greater installed after December 31, 2022, are also eligible.
Claiming the Credit: To claim the ITC, complete IRS Form 5695 and submit it with your federal tax return. The credit is non-refundable, meaning it can reduce your tax liability to zero, but any excess credit cannot be refunded. However, unused credit can be carried forward to subsequent tax years.
Recent Updates and Considerations:
In January 2025, the current administration finalized rules for clean electricity investment and production tax credits, emphasizing the importance of maintaining these incentives to reduce energy bills, accelerate clean energy deployment, and foster low-carbon technology. These credits, part of the 2022 Inflation Reduction Act, aim to significantly cut U.S. emissions and save consumers up to $38 billion on electricity by 2030.
It's important to note that the ITC is set to transition into the Clean Electricity Investment Tax Credit in 2025, as part of broader efforts to streamline and enhance clean energy incentives.
Conclusion:
The federal solar tax credit continues to be a substantial incentive for those considering solar energy investments in 2025. With a 30% credit available through 2032, transitioning to solar energy remains a financially advantageous and environmentally responsible decision. Staying informed about the latest policy updates and consulting with a tax professional can help maximize the benefits of the ITC for your specific situation.