What is the Federal Solar Tax Credit?

Editor's note: In 2022, the president signed the Inflation Reduction Act (IRA) into law, thereby increasing the solar Investment Tax Credit to 30% for the purchase of solar systems and solar battery storage through 2032.* Learn more about the clean energy benefits of the IRA and how you can save when going solar.

In December 2020, Congress approved an economic stimulus package designed in part to provide COVID-19 relief. That package included a two-year extension of the federal solar investment tax credit (ITC). The ITC for solar customers was originally scheduled to drop from 26% in 2020 to 22% in 2021 and then be phased out all together in 2022.

But this recent stimulus package provided a big ray of sunshine to homeowners who plan to start using solar energy to reduce their carbon footprint. Lawmakers extended the deadline for the ITC, one of the most important policy drivers for solar power in every state in the U.S. The ITC enables owners of residential, commercial and utility-scale solar projects to receive a tax credit on a percentage of the total installed cost of their solar system, making this clean energy approach much more economical.

Thanks to the recent extension, the tax credit will now stay at 26% for two more years. That means in 2021 and 2022, qualified homeowners in every state who purchase a new SunPower® solar system may be eligible for a 26% credit of the cost of their systems that can be applied toward their tax return debt.* In 2023, they may be eligible to receive a 22% credit, and unless its renewed again, the credit will end in 2024.

This extension comes as a welcome relief for customers who plan to purchase solar, SunPower, and SunPower’s top-notch network of solar installers. After setbacks to the solar industry in 2020 due to COVID-19, the extension of the tax credit will help ensure the continued resilience of clean, renewable energy throughout the phase of the global pandemic and beyond.

What is the federal solar tax credit (ITC)?

federal solar tax credit

The Solar Investment Tax Credit (ITC) is a federal tax credit for those who purchase solar energy systems for residential, commercial or utility scale properties. The credit, which is applied to a homeowner’s federal income tax return debt, is equal to a percentage of the cost of eligible equipment.

How much can the federal solar tax credit save me?

That depends on when you start construction (and when you start generating electricity). In 2021, the credit is equal to 26% of the cost of eligible solar equipment. It steps down to 22% in 2023 and is scheduled to phase out completely in 2024. The sooner you act, the more you can save.*

What exactly is a solar energy credit?

A solar energy credit, or more formally a solar investment tax credit (like other tax credits), is not a tax rebate and is not a deduction. While a rebate pays you back, a credit offsets the balance of tax due on your tax return. So, if you owe little to no federal taxes there is little to nothing to offset, and you won’t be able to take full advantage of the credit.*

How do I receive my federal solar tax credit?

To receive your credit, you must complete IRS Form 5695 when you file your taxes and add your renewable energy credit information to your typical form 1040. Popular federal tax filing software include this credit as a default. If you use an accountant or tax processor, tell them that you purchased solar.

On the other hand, if you pay at least as much in taxes as you get for your tax credit, you can pay off your tax debt with the credit and/or get the remainder after withholding as a refund. Even better, if you don’t owe the full amount of your tax credit in the first year, you can roll the credit over to pay tax debt accrued in the following years (for as long as the ITC is in effect).*

How do I qualify for the federal solar tax credit (ITC)?

To qualify for the full 26% federal solar ITC, you must meet the following requirements:*

  • Valid through December 31, 2022 (and drops to 22% from January 1 – December 31, 2023). Consult your tax advisor for details.

  • You must own your home. Renters are not eligible.

  • You must own your solar panels. If you lease a solar system, you cannot claim the credit directly.

  • You must pay enough taxes to the federal government to qualify for the 26% tax credit. It’s a tax credit, not a rebate.

  • After 2023, the residential credit drops to zero under the current plan.

Can I claim a federal solar tax credit for my solar energy system?

If you purchase your solar system, you may qualify for the ITC. The ITC is a credit against federal income tax for qualifying solar energy systems on residential properties placed in service before December 31 of a given tax year. The credit is determined by calculating 26% of the total eligible cost of qualifying solar systems. Generally, a tax credit is a dollar-for-dollar reduction in the income taxes that a taxpayer would otherwise pay to the federal government. Credits are subject to limitations, so the IRS rules should be consulted before any benefit is represented on your tax filing. If you have questions, you should consult your tax advisor regarding the Solar ITC and how it applies to your specific facts and circumstance. SunPower does not warrant, guarantee or otherwise advise its customers about specific tax outcomes.*

Do I need to purchase my solar system?

You may not have to buy a solar system outright to take advantage of the ITC. It’s possible to claim the credit with a solar loan, and sometimes the savings can be passed along as part of the solar lease. Here’s a quick summary:

  • Cash purchase: You own the system, energy and ability to apply for tax credits.

  • Loan: You may be entitled to the full ITC credit even if you put $0 down.

  • Lease: ITC savings can be passed along as part of your lease contract, but you cannot claim them directly. You may benefit from the ITC in the form of a lower monthly lease payment. The company who owns your leasing agreement can apply for the credit directly and will be responsible for passing along any leasing discounts related to the credit they receive.