As part of the federal government’s push to encourage clean and renewable energy, homeowners who install solar energy systems may qualify for a substantial federal solar tax credit, officially known as the Residential Clean Energy Credit under IRC Section 25D.
Under current law, the credit equals 30% of the total cost of purchasing and installing a qualifying solar energy system. This includes panels, inverters, mounting equipment, wiring, and installation labor.
For example, if your total cost to purchase and install a solar system is $30,000, you may be eligible for a $9,000 federal tax credit (30% of $30,000), directly reducing your federal income tax liability.
Important ownership rule
To claim the Residential Clean Energy Credit, you must own the solar system. Systems that are leased or installed under a power purchase agreement (PPA) do not qualify for the federal credit. The credit is claimed on Form 5695 for individuals (or Form 3468 for businesses).
Nonrefundable credit with carryforward
The federal solar tax credit is nonrefundable, meaning it can reduce your tax liability to zero but will not generate a refund on its own. Any unused credit is carried forward to future tax years until fully used.
Current and future credit percentage
Thanks to the Inflation Reduction Act, the federal solar tax credit is locked in at 30% for systems placed in service from 2022 through 2032. The credit is scheduled to phase down to 26% in 2033 and 22% in 2034, unless Congress extends it again.
New York State solar tax credit
In addition to the federal benefit, New York residents may qualify for the New York State Solar Energy System Equipment Credit (Form IT-255). This credit equals 25% of qualified solar energy expenses, capped at $5,000 per residence.
Unlike the federal credit, the New York credit does apply even if the system is installed under a lease or power purchase agreement (PPA), making it available to a broader group of homeowners.
Additional state and local incentives
Many states, municipalities, and utility companies offer additional solar incentives, rebates, and property-tax exemptions. These programs vary widely by location and may change frequently, making proper tax planning and documentation critical.
Bottom line
Between federal, state, and local incentives, installing solar panels can result in significant long-term tax savings, but eligibility depends on ownership structure, timing, and proper reporting. Working with a tax professional can help maximize available credits while staying compliant with IRS and state rules.
