Trystan Casey
Solar electricity is becoming an increasingly popular way to reduce electricity costs and carbon footprints. With utility rates rising and household electricity usage increasing, many homeowners are looking for ways to lower their electricity bills. While the installation of solar power equipment can be costly, federal and state solar tax credits can help offset some of these costs. These tax credits are available to those who invest in renewable energy sources for their homes, such as solar panels, wind turbines, geothermal heat pumps, and battery storage technology. The amount of tax credit varies by state and year of installation, but it generally ranges from 22-30% of the total installation cost. This credit can be used to directly reduce the amount of tax owed, providing a dollar-for-dollar reduction in taxes.
| Characteristics | Values |
|---|---|
| Cost of solar electricity | The cost of installing residential solar systems has dropped by nearly $15,000 over the past two decades. However, costs vary among states. |
| Monthly savings | You can calculate your monthly solar savings by subtracting the payments for your solar system from your average electricity bill. |
| Federal tax credit | The Residential Clean Energy Credit allows you to claim a deduction for the cost of new clean energy property, including solar panels. The credit for solar upgrades has been extended through 2034. |
| State tax credit | Some states offer solar tax credits that work similarly to the federal tax credit. The state tax credit will be worth a certain percentage of the solar installation costs and reduce taxpayers' state income tax liability. |
| Net metering | Most utilities offer net metering, in which solar owners earn credit for the excess electricity they push onto the grid. |
| Solar battery | If your utility doesn't offer incentives or pays a low rate for electricity sold back to the grid, solar panels likely won't bring your electricity bill to zero without a solar battery to store power. |
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What You'll Learn
Residential Clean Energy Credit
If you invest in renewable energy for your home, such as solar, wind, geothermal, fuel cells, or battery storage technology, you may qualify for an annual Residential Clean Energy tax credit. The Residential Clean Energy Credit equals 30% of the costs of new, qualified clean energy property for your home installed from 2022 through 2032. The credit percentage rate phases down to 26% for property placed in service in 2033 and 22% for 2034. After 2034, the credit is scheduled to end.
The Residential Clean Energy Credit allows you to claim a deduction for the cost of new clean energy property, including solar panels. The credit for solar upgrades has been extended through 2034, empowering more homeowners to switch to solar. When you purchase (not lease) new solar-powered equipment that generates electricity or heats water, or purchase solar power storage equipment, you can generally claim the Residential Clean Energy Credit to lower your tax bill.
To qualify for the Residential Clean Energy Credit, the clean energy property must meet certain standards. Solar water heaters must be certified by the Solar Rating Certification Corporation or a comparable entity endorsed by your state. Geothermal heat pumps must meet Energy Star requirements in effect at the time of purchase. Battery storage technology must have a capacity of at least 3 kilowatt-hours. Fuel cell property is limited to $500 for each half kilowatt of capacity.
Qualified expenses may include labor costs for onsite preparation, assembly, or original installation of the property and for piping or wiring to connect it to the home. Traditional building components that primarily serve a roofing or structural function generally don't qualify. For example, roof trusses and traditional shingles that support solar panels don't qualify, but solar roofing tiles and solar shingles do because they generate clean energy. When calculating your credit, you may need to subtract subsidies, rebates, or other financial incentives from your qualified property expenses because they're considered a purchase-price adjustment.
You can claim the Residential Clean Energy Credit for improvements to your main home, whether you own or rent it. Your main home is generally where you live most of the time. The credit applies to new or existing homes located in the United States. You can't claim the credit if you're a landlord or other property owner who doesn't live in the home. You may be able to claim a credit for certain improvements made to a second home located in the United States that you live in part-time and don't rent out.
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Solar panels and upfront costs
Solar panels can be a costly endeavour, with the average cost of installing an average-size home solar system in 2025 being $29,360 before federal tax credits and incentives. The federal solar tax credit may reduce the net cost to $20,552, and local incentives can further lower the cost. The cost of installing residential solar systems has dropped by nearly $15,000 over the past two decades, making solar more accessible for many homeowners. However, costs vary among states.
The more efficient the solar panel and the higher the output capacity, the more expensive it will be. The size of your solar energy system refers to how much solar energy it produces, usually measured in kilowatts. The more kilowatts your system produces, the more it may cost upfront because it either requires more panels, uses more efficient (and more expensive) panels, or both. A higher kW system could save you more money over time by producing more energy.
There are a few ways to lower your upfront costs. You can finance your solar panel system with a solar loan or lease, install a smaller system, or choose less expensive equipment. While some of the best solar panels are the priciest, you can still get high-quality equipment without paying a premium. Additionally, you can save money by shopping around for quotes from different installation companies, as each company has its own pricing structure.
The Residential Clean Energy Credit allows you to claim a deduction for the cost of new clean energy property, including solar panels. This credit has been extended through 2034, empowering more homeowners to switch to solar. The credit equals 30% of the costs of new, qualified clean energy property for your home installed from 2022 through 2032. The credit percentage rate then phases down to 26% in 2033 and 22% in 2034. To qualify, the energy-saving improvements need to be made to your US residence, which can be a house, mobile home, cooperative apartment, condominium, manufactured home, or houseboat.
The payback period for solar panels is typically 5-10 years, depending on factors like your utility rate, electricity consumption, and financing method. With a solar loan, many homeowners can achieve “Day 1” savings by having a loan payment that’s lower than their average electricity bill. However, interest payments on the loan will eat into long-term energy cost savings. By paying cash for solar, homeowners maximize their lifetime savings potential but typically need to wait 5-10 years to recoup the upfront investment.
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Tax credits and rebates
If you invest in renewable energy sources for your home, such as solar, wind, geothermal, fuel cells, or battery storage technology, you may qualify for an annual residential clean energy tax credit. This credit is known as the Federal Solar Tax Credit or the Residential Clean Energy Credit. The Residential Clean Energy Credit equals 30% of the costs of new, qualified clean energy property for your home installed anytime from 2022 through 2032. The credit percentage rate phases down to 26% for property placed in service in 2020 through 2021 and 2033, and 22% for property placed in service in 2034. After 2034, the credit is scheduled to end.
The Residential Clean Energy Credit allows you to claim a deduction for the cost of new clean energy property, including solar panels. To qualify for the tax credit, the solar PV system must be installed between January 1, 2017, and December 31, 2034, and located at a residence in the United States. Additionally, you must own the solar PV system, meaning you purchased it with cash or financing, rather than leasing it or paying a solar company for the electricity generated.
When calculating your tax credit, you may need to subtract subsidies, rebates, or other financial incentives from your qualified property expenses as they are considered a purchase-price adjustment. Public utility subsidies for buying or installing clean energy property are subtracted from qualified expenses, whether they come directly to you or to a contractor on your behalf. However, utility payments for clean energy sold back to the grid, such as net metering credits, do not affect your qualified expenses.
State energy efficiency incentives are generally not subtracted from qualified costs unless they qualify as a rebate or purchase-price adjustment under federal income tax law. Many states offer incentives like sales tax rebates or other programs to lower the cost of solar power systems. Additionally, some utilities offer assistance to make solar more affordable for their customers.
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$13.9 $25
State-level incentives
Some states also offer sales tax rebates and other programs to reduce the cost of solar power. Additionally, some utilities provide incentives to make solar power more affordable for their customers. For example, California utility PG&E offers rebates of 15-20% of the solar battery cost for all customers and up to 100% for customers in areas prone to power outages.
Thirty states and the District of Columbia have renewable portfolio standards (RPS) or clean energy standards (CES) that mandate electric utilities to supply a certain amount of electricity from renewable sources. Eight more states have non-binding or "voluntary" renewable portfolio goals. This incentivizes governments to reward residents who help the state achieve its goal.
In some states, homeowners can earn solar renewable energy certificates (SRECs) for each megawatt-hour (or 1,000 kWh) of clean energy generated by their solar panels. Public utilities will purchase these certificates with cash to meet their RPS requirements. The value of an SREC can vary from $5 to $450 depending on the local marketplace.
Furthermore, the New York State Energy Research and Development Authority (NYSERDA) offers solar loan opportunities with low-interest rates and affordable down payment requirements, making solar power more accessible.
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Monthly savings
Solar panels can help you save money on your monthly electricity bills. The average US electricity bill in the first half of 2023 was $146.92, based on a monthly consumption of 881 kWh and an average utility rate of 16.7 cents per kWh. With a properly sized system, your monthly utility electricity charges will be zero (excluding fixed fees). However, it takes time to recoup the upfront investment in your solar system.
The cost of installing a residential solar system has dropped by nearly $15,000 over the past two decades, making solar more accessible to homeowners. The more efficient and higher the output capacity of the solar panel, the more expensive it will be. Adding extra hardware, such as batteries for storage, will increase the cost of a new system. Each installation company has its own pricing structure for installation. Therefore, it is advisable to obtain several quotes to compare prices.
You can calculate your monthly solar savings by subtracting the payments for your solar system from your average electricity bill. For example, if your average bill is $150 per month and your solar loan payments are $120 per month, your savings would be $30 per month. However, while your solar payments remain the same throughout your loan, your electricity bill will continue to rise as rates increase. As a result, your initial monthly savings of $30 will eventually increase to $50, $75, and then over $100 per month.
You can increase your cumulative solar savings by paying for the system in cash instead of taking out a loan and incurring interest charges. With a cash purchase, solar panels typically take 7-10 years to pay for themselves, known as the payback period. However, the lifetime savings are much greater than financing the same system with a loan.
To encourage the use of solar energy, the federal government and some states offer tax credits and incentives. The federal solar tax credit, also known as the Residential Clean Energy Credit, allows you to claim a deduction for the cost of new clean energy property, including solar panels. The credit for solar upgrades has been extended through 2034, empowering more homeowners to switch to solar. The credit equals 30% of the costs of new, qualified clean energy property installed from 2022 through 2032. It then phases down to 26% in 2033 and 22% in 2034.
Some states also offer incentives like sales tax rebates, property tax exemptions, waived fees, and expedited permits to lower the cost of installing solar panels. Additionally, some utilities offer assistance to make solar more affordable for their customers.
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Frequently asked questions
The Residential Clean Energy Credit is a federal tax credit that allows you to claim a deduction for the cost of new clean energy property, including solar panels.
The Residential Clean Energy Credit is worth 30% of the costs of new, qualified clean energy property for your home installed from 2022 through 2032. The credit percentage rate phases down to 26% for property placed in service in 2033 and 22% in 2034. After 2034, the credit is scheduled to end.
To qualify for the Residential Clean Energy Credit, you must pay for the installation of qualifying equipment, such as solar panels, wind turbines, geothermal heat pumps, fuel cells, and battery storage systems. You must also own the system and have taxable income.
To claim the Residential Clean Energy Credit, you must file Form 5695, Residential Energy Credits, with your tax return. You will need to input the total cost of your solar system and calculate the total credit value by multiplying the total qualified costs by 30%.
Yes, in addition to the federal tax credit, some states offer solar tax credits and rebates. They may also offer sales and property tax exemptions, waived fees, and expedited permits. Additionally, utilities may offer net metering, which provides credit for the excess electricity generated by solar panels that is sent back to the grid.
