How the Residential Solar Tax Credit Works

Here's what you need to know about the 30 percent credit for residential installations, and who will benefit the most

The federal solar tax credit is a big boon to homeowners who want to add solar panels to their home. But those who will reap the most benefit include those who pay a lot for their electricity (or expect to in the future); those who usually owe the IRS at tax time; those who plan to buy (not lease) solar panels; and those who expect to stay put in their homes for a while.

The solar tax credit, which is among several federal Residential Clean Energy Credits available through 2032, allows homeowners to subtract 30 percent of the cost of installing solar heating, electricity generation, and other solar home products from their federal taxes.

The credit has helped reduce the average price of a solar panel installation to $20,650 from more than $50,000 10 years ago, says EnergySage, an alternative energy marketplace. The average homeowner, it adds, could break even on the investment in 8.7 years. While that's a lofty price tag and a fairly long wait for a return on investment, the savings could be greater—and the break-even point sooner—if, among other factors, you pay more than the average in electricity costs and can benefit from state tax incentives. (Use EnergySage's solar calculator to estimate when you’d break even.)

And because the credit will be available to taxpayers for nearly a decade, homeowners considering a solar installation have plenty of time to consider their options and look for the best solar deals.

Here are key details.

If you install solar energy equipment in your residence any time this year through the end of 2032, you are entitled to a nonrefundable credit off your federal income taxes equal to 30 percent of eligible expenses. There's no dollar limit on those expenses; you’re entitled to that 30 percent tax break whether you spend $20,000 or more than $100,000 on costs associated with a residential solar system.

CR explains how buying a heat pump for your home could get you thousands of dollars in federal tax credits and state rebates. We also fill you in on credits and rebates for electric cooking appliances and which cars qualify for the electric vehicle tax credit.

According to the Internal Revenue Service, these expenses are eligible for the solar tax credit:

The credit lowers your federal taxes. So if you spend $24,000 on a system, you can subtract 30 percent of that, or $7,200, from the federal taxes you owe. (You must take the credit for the year the installation is completed.) If, say, you would owe $7,000 in taxes before the credit, a $7,200 credit would drop what you owe to zero. You can't get a tax refund for the $200 remainder, but you can carry forward that remaining credit into a later tax year.

You’ll save, too, in lower electricity bills. How much you’ll save depends on a number of factors, including how much electricity your household uses, the size of your solar system and the amount of sunlight it gets, and local electricity rates. Real estate experts say a purchased solar system—as opposed to a leased one—can raise the value of your home when you sell.

The 30 percent credit lasts until Dec. 31, 2032. It drops to 26 percent in 2033, then 22 percent in 2034, and disappears in 2035, unless Congress continues it. (The law that provides for this credit supersedes an older law, set to expire in 2024, that would have provided a 26 percent credit for solar installations this year, and 22 percent in 2023.)

It's available to all taxpayers for their primary or secondary residence located in the U.S. Taxpayers of any income level can take advantage of it. You can use it whether you itemize your taxes or take the standard deduction. Keep in mind, though, that the solar tax credit is available only if you purchase a solar system; if you lease one, you can't take advantage of the credit. The same applies if you are a member of a power-purchasing cooperative. However, if you are a tenant-stakeholder in a co-op, you can claim credit for your portion of the purchase. You can also claim credit for your portion of the purchase of a community-owned solar system.

Your federal tax credit isn't reduced by any solar tax credit your state may offer. But it will be up to your state's taxing authority whether your state credit is reduced if you take advantage of the federal one. New York, for example, does not cut its solar incentives for people who take advantage of federal ones; state residents can credit 25 percent of qualified solar energy system equipment expenditures from their state taxes, up to $5,000. You don't get a refund if that amount is more than what you’d owe, but you can carry over the difference for up to five years.

Yes. You also can take advantage of the federal Nonbusiness Energy Property Credit, which covers other qualifying efficiency upgrades, such as Energy Star certified exterior windows, Energy Star certified exterior doors, air-sealing insulation, upgraded electrical circuit panels, and heat pumps. You can claim both credits on your federal return—either in the same year or different years, depending on when the installations are completed.

This credit, also known as the Energy Efficient Home Improvement Credit, has dollar caps for some products—for example, $600 on windows. For most items, however, you can claim 30 percent of the cost up to $1,200 total annually. (Heat pumps are exempt from the per-item or per-year maximums; you can claim up to $2,000 for heat-pump purchase and installation costs.)

A big plus: You can claim the Nonbusiness Energy Property Credit every tax year through 2032. In the past, taxpayers who exceeded "lifetime limits" for qualifying home improvements under that provision couldn't claim the credit for later improvements.

In theory, that means you could install one or two new Energy Star certified windows each year, and qualify toward the $1,200 credit. "That might be irritating to your window supplier and fairly inconvenient for you," says Mark Luscombe, principal analyst at Wolters Kluwer Tax & Accounting, a financial publisher. "But you could do it."

Tobie Stanger

Tobie Stanger is a senior editor at Consumer Reports, where she has been helping readers shop wisely, save money, and avoid scams for more than 30 years. Most recently, her home- and shopping-related beats have included appliance and grocery stores, generators, homeowners and flood insurance, humidifiers, lawn mowers, and luggage—she also covers home improvement products like flooring, roofing, and siding. During off-hours, she works on her own fixer-upper and gets her hands dirty in the garden. Follow her on Twitter @TobieStanger.