Solar Tax Credits & Incentives: What You're Owed
Solar Tax Credits & Incentives: What You’re Owed
A plain-English breakdown of the federal Investment Tax Credit, state-level programs, and how to structure your purchase to capture every dollar available to you.
SOURCES: IRS.gov · U.S. DOE · DSIRE Database · State Revenue Agencies
The Federal Investment Tax Credit (ITC)
The federal solar Investment Tax Credit allows homeowners who purchase a solar energy system to claim 30% of the total installed system cost as a direct credit against their federal income tax liability. This is not a deduction — it is a dollar-for-dollar reduction in what you owe the IRS.
How It Works
If your solar installation costs $24,000, you are entitled to claim a $7,200 credit on your federal return. If your tax liability in the year of installation is less than $7,200, the unused portion carries forward to subsequent tax years — you do not lose it.
The credit is claimed on IRS Form 5695 (Residential Clean Energy Credit) and applies to the tax year in which the system is placed in service — meaning operational and connected to your home’s electrical system.
What Qualifies
- Solar photovoltaic panels and mounting hardware
- Inverters, wiring, and balance-of-system equipment
- Battery storage systems directly charged by the solar array
- Permitting and inspection fees
- Installer labor costs
The credit applies to your primary residence and a second home. It does not apply to leased systems — the ITC goes to the leasing company, not you. This is a key financial reason to own rather than lease.
| System Cost | Federal Credit (30%) |
|---|---|
| $20,000 | $6,000 |
| $24,000 | $7,200 |
| $30,000 | $9,000 |
| $36,000 | $10,800 |
Important: The ITC is scheduled to remain at 30% through 2032, then step down to 26% in 2033 and 22% in 2034. Current law sunsets it for residential use after 2034. Acting sooner captures the full 30%.
The Domestic Content Bonus: An Additional 10%
The Inflation Reduction Act of 2022 introduced a supplemental credit — the Domestic Content Bonus — for solar installations that meet requirements for American-manufactured components. This bonus adds 10 percentage points to the base ITC rate, bringing the total to 40% of system cost for qualifying installations.
| Credit | Rate | Description |
|---|---|---|
| Standard ITC | 30% | Available to all qualifying purchasers |
| Domestic Content Bonus | +10% | US-manufactured panels & components |
| Total Credit Available | 40% | On a qualifying system |
What the Requirements Are
To qualify for the bonus, the solar project must use steel and iron that is produced in the United States, and manufactured products in the project must meet a threshold for domestic content. IRS guidance (Notice 2023-29 and subsequent updates) provides the specific percentage thresholds, which vary by project type and size.
For most residential installations, the practical path to the domestic content bonus is specifying panels from a U.S. manufacturing facility — see our Buy American Guide for the relevant manufacturers. Your installer should be able to provide documentation supporting the domestic content claim.
The domestic content bonus rules are detailed and subject to IRS guidance updates. Consult a qualified tax professional to confirm eligibility before claiming.
State-Level Incentives: Top 10 Markets
Beyond the federal ITC, most states offer additional incentives. Below are the programs in the ten highest-volume solar markets. The DSIRE database at dsireusa.org maintains the most current state-by-state listing.
| State | State Credit | Net Metering | Property Tax Exemption | Sales Tax Exemption |
|---|---|---|---|---|
| Florida | No state income tax | ✓ Full retail rate | ✓ 100% exempt | ✓ Exempt |
| Texas | No state income tax | Varies by utility | ✓ 100% exempt | ✓ Exempt |
| Arizona | ✓ 25% credit, up to $1,000 | Reduced rate (APS/SRP vary) | ✓ 100% exempt | ✓ Exempt |
| Georgia | No state credit currently | ✓ Retail rate (most utilities) | ✓ Exempt | ✓ Exempt |
| South Carolina | ✓ 25% credit, up to $3,500/yr | ✓ Retail rate | ✓ Exempt | ✓ Exempt |
| North Carolina | No state credit currently | ✓ Retail rate (Duke, Dominion) | ✓ 80% exempt | Partial exemption |
| Virginia | No state credit currently | ✓ Retail rate | ✓ Exempt | ✓ Exempt |
| Colorado | No state credit currently | ✓ Retail rate (most utilities) | ✓ Exempt | ✓ Exempt |
| Nevada | No state income tax | Below retail rate (NV Energy) | ✓ Exempt | ✓ Exempt |
| California | No state credit currently | NEM 3.0 — reduced export rate | ✓ Exempt | ✓ Exempt |
Net metering policies are subject to change by state PUC proceedings. Verify current rates with your utility before installation. Source: DSIRE (dsireusa.org), state revenue agency publications.
Own vs. Lease: The Incentive Difference
This is the single most important financial distinction in residential solar. It deserves a direct statement:
If you lease a solar system, the leasing company — not you — claims the 30% federal Investment Tax Credit. You receive no ITC, no domestic content bonus, and no property value increase attributable to the panels. You are paying a different kind of rent.
Solar Ownership (Purchase or Loan)
- ✓ You claim the 30% federal ITC
- ✓ Eligible for domestic content bonus credit
- ✓ Property value increases flow to you
- ✓ System is a capital asset on your balance sheet
- ✓ No monthly payment to a third party after payoff
- ✓ Full benefit of net metering credits goes to you
Solar Lease or PPA
- ✗ Leasing company claims the ITC
- ✗ No domestic content bonus for you
- ✗ Property value benefit uncertain
- ✗ Monthly payment obligation continues
- ✗ Complicates home sale (lease transfer required)
- ✓ Lower upfront cost (if cash-constrained)
For a homeowner who qualifies for the ITC but is concerned about upfront cost, a solar loan is almost always a better financial structure than a lease. A $0-down solar loan at current market rates typically produces a Day 1 monthly payment below the utility bill it replaces — without surrendering the tax credit, the property value gain, or ownership of the asset.
DATA SOURCED FROM: IRS.gov · DSIRE · U.S. DOE · State revenue agencies · NREL