Solar Investment Tax Credit (ITC) Explained

Written by Caitlin Ritchie

Edited by Hannah Hillson

Last updated 08/24/2022

Ariel Skelley/DigitalVision/Getty images

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Solar Tax Credit extended to 2034

The Residential Clean Energy Credit, previously known as the Investment Tax Credit (ITC), has been extended to 2034 and now offers 30% in tax credits to consumers who purchase solar panels. The increased credit can be retroactively applied to solar systems purchased at the beginning of 2022.

The Solar Tax Credit was formally set to expire in 2024 but will now remain at 30% through 2032. It will drop to 26% in 2033 and 22% in 2034. It is set to expire in 2035 unless it is renewed again.

What is the Solar Tax Credit?

In 2022, the Solar Tax Credit offers a federal tax credit of 30% when you install solar panels on your property. The Solar Tax Credit has many names, including the IRS solar tax credit, solar ITC, or the investment tax credit. Recently, the Solar Tax Credit was renewed as the Residential Clean Energy Credit as part of the Inflation Reduction Act.

Keep reading to find out how the Solar Tax Credit can help you save on your 2022 taxes, what you need to qualify, and how to apply.

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History of the Solar Tax Credit

The Solar Tax Credit was created in 2005 and originally offered 30% tax credits. In 2020, the tax credit was lowered to 26%. In August 2022, the Inflation Reduction Act raised the Solar Tax Credit back to 30% for another 10 years. 

The price of residential solar panels has steadily declined since the launch of the tax credit. According the the Lawrence Berkeley National Laboratory’s Tracking the Sun report, solar panel costs have dropped by more than 50% in the last decade. So, the value of the Solar Tax Credit in 2022 is even greater than in past years. 

Solar ITC by Save On Energy

Qualifying for the Solar Tax Credit

Many types of homes and apartments qualify for the Solar Tax Credit, including single-family homes, mobile and manufactured homes, apartments and condominiums. Other less-traditional structures, such as houseboats, and cooperative apartments can qualify for the Solar Tax Credit as well. 

You can even claim the Solar Tax Credit for rental properties you own, as long as you live there for a portion of the year. In this case, the percentage you can claim will depend on the amount of time you reside in your rental property each year. For example, if you live at your rental property for half of the year, and rent it out the other half of the year, you will be allowed to claim 50% of the tax credit. 

However, solar consumers who lease their system or enter into a solar power purchase agreement (PPA), are not eligible for the Solar Tax Credit, which is only available if you purchase your solar energy system. If you do not own your solar setup, then the company that owns it is able to claim the Solar Tax Credit.

Solar Tax Credit requirements

  • You installed, or will install, a solar panel system between January 1, 2006 and December 31, 2034.
  • The solar system is installed on your primary or secondary place of residence.
  • You own the solar system and did not lease it or sign a power purchase agreement.
  • You invested in a portion of a community solar project and the energy it generates is credited against and does not exceed your home’s electricity usage.
  • The solar system is new or is installed for the first time. You do not qualify for the Solar Tax Credit if you bought a home that already has a solar system installed, for example.

Although solar panels are top of mind for most people when it comes to solar energy, the Solar Tax Credit covers several types of energy-saving hardware, as well as some labor costs. So, supplementary solar equipment, such as solar roof products and solar batteries, also qualify for the 30% Solar Tax Credit in 2022.

Applying for the Solar Tax Credit

Filing for the Solar Tax Credit in 2022 isn’t too difficult. You will have to fill out and return IRS form 5695. The IRS also provides a printable worksheet with instructions to calculate your expenses and limitations to aid in filling out form 5695. Here’s everything you need:

If you’re out of practice or new to filling out tax forms, worry not. Just remember to keep all receipts. There are also YouTube videos that offer instructions on filling out form 5695. And online tax software, such as Turbotax, will have this form available as well. 

There is no extra cost to apply for the Solar Tax Credit (other than the ordinary costs you might incur from getting your taxes done and mailing in forms). Once you’ve sent in your taxes, you should hear back about the result of your Solar Tax Credit in the standard time it takes to receive your federal tax return.

Let’s zoom out for a moment and look at the big picture to get a better idea of how the Solar Tax Credit can help you. Even after receiving the tax credit for your new solar panel system, savings will continue to roll in over the long term. Residual savings should add up pretty quickly thanks to the low electricity rates solar owners enjoy. By going green and powering your home with solar energy, green electricity rates can keep your monthly electricity bill lower for years to come.

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How to claim your IRS Solar Tax Credit

Now that you know how you can benefit from the federal Solar Tax Credit, it is important to understand how you will be receiving your rebate from the IRS. 

The IRS offers this refund as a tax credit, which means you will not receive a check for the money you spent. You will, however, receive your savings in the form of a credit on your taxes. So, hypothetically, if you were to file your taxes and ended up owing $4,000 in federal taxes, but you qualified for $3,900 in tax credits due to the Solar Tax Credit, then you would only have to pay the difference of $100 in federal taxes. 

Some solar businesses, such as Tesla, are making it even easier to claim your IRS Solar Tax Credit by bundling solar purchases — such as solar panels and batteries. Check to see if your local solar provider offers bundling as an option to make it easier to keep track of your expenses and file for the tax credit. 

However, remember you will not receive any credits or refunds if you do not owe federal taxes. 

You also cannot apply the tax credit to state taxes. If you owe federal taxes, but in a lesser amount than your credit, you will only receive a credit up to the amount you owe. Fortunately, the Solar Tax Credit can carry over to the next tax year. And, if you previously met the criteria for the tax credit but did not claim it, you can file an amended tax return for last year to get your Solar Tax Credit.

Solar Tax Credit carryover in 2022

If you are interested in claiming the Solar Tax Credit, you will need to do so for the same tax year that your solar system is installed. This means that if you purchased solar panels at the end of 2021 and the installation isn’t complete until January 2022, you will claim the Solar Tax Credit on your 2022 tax return.

So, what if the value of the Solar Tax Credit is more than you owe in income taxes? While you can’t use the tax credit to receive money back from the IRS, the Solar Tax Credit rollover lets you roll the tax credit back one year and carry the credit forward for up to five years. So, if you didn’t owe federal taxes last year, you can still claim the Solar Tax Credit on this year’s tax return. And if the Solar Tax Credit offers you more than you owe in federal taxes, you will receive the difference in the next tax year until the credit is fully claimed.

For example, if the Solar Tax Credit credits you $3,000 when you owe $2,500 in taxes, that extra $500 from the credit would roll over into the next tax year. That means you wouldn’t have to pay anything in the current tax year, and you will receive a $500 credit on next year’s taxes as well.

Solar Tax Credit Cost Savings

The Solar Tax Credit has not only helped consumers to save on the cost of solar panels, it has also fueled the growth of the renewable energy market. According to the Solar Energy Industries Association (SEIA), “since the ITC was enacted in 2006, the U.S. solar industry has grown by more than 10,000%.” By taking advantage of the 2022 Solar Tax Credit this year, you can join the over half a million homes and businesses that have taken the step towards energy independence, encouraged job creation in the solar market, and saved on their energy bills. 

The Solar Tax Credit can make installing solar panels a strategic investment, but it won’t mean getting your solar energy system entirely free. You will still have upfront or monthly payments, depending on if you finance your system, purchase your system outright, or lease your solar panels

If you’ve been thinking about joining the thousands of people that already benefit from solar energy, using the Solar Tax Credit in 2022 is a great way to lower the cost of a solar system. The average solar panel system costs approximately $26,882, which would make the 30% tax credit worth more than $8,000.

Remember, this is a federal incentive for solar energy systems, which means you can claim it no matter which state you live in. Check to determine whether your state offers additional solar incentives or rebates to maximize your savings.

Find your state below to learn more about solar panel pricing and incentives in your area.

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