Homeowner's Guide — Education

How Solar Tax Credits Work

Going solar is a significant investment, but it is also one of the smartest investments you can make as a homeowner. If you are researching how to go solar, you have most likely read about the different state and federal solar tax credits available to homeowners.

You can reduce the upfront costs of going solar by taking advantage of the many federal, state, and local tax credits available to homeowners.

How Does the Federal Sales Tax Credit work?

While there are many different local and state tax credits available to homeowners, the Investment Tax Credit (ITC) also called the federal solar tax credit is available to all homeowners who live in the United States.

The federal solar tax credit is valued at a percentage of what you spend to install your home’s solar PV system. Homeowners can deduct 26% of the cost of their new solar system in 2022. In 2023, homeowners will be able to deduct 22% of their costs.

The average cost for a new solar panel system is $16,000. In that case, a homeowner who installs their home’s system in 2022 will receive a 26% deduction which amounts to $4,160. That person can then claim a tax credit of $4,160 which reduces their total federal income tax amount by $4,160.

You can roll over your federal solar tax credit to a future year, if your taxes owed in the year you installed your system are less than the credit you earned.

There is no cap on the value of your tax credit, so homeowners in all income brackets are eligible for the federal solar tax credit.

We recommend you check out our Homeowners Guide to the Federal Solar Tax Credit to learn more about your eligibility and how to file for the tax credit

How Do Local and State Solar Tax Credits work?

State and local tax credits work the same way as the federal solar tax credit, but for your state income taxes.

Not every state offers tax credits and the amount of the tax credit will vary by individual state. If you live in a state that offers state tax credits for going solar, this will not reduce the amount of your federal solar tax credit.

If your state provides you with state tax credits, your taxable income on your federal tax returns may be higher, since you have less state income tax to deduct.

Tax Credit Resources for Homeowners

US Department of Energy Homeowner’s Guide to the Federal Tax Credit

The U.S. Department of Energy Homeowner’s Guide to the Federal Tax Credit for Solar Photovoltaics can help answer questions about your eligibility for the tax credit, expenses you can include, rebates, and other tax incentives.

DSIRE Incentives Database

The Database of State Incentives for Renewables and Efficiency (DSIRE) is a comprehensive database for homeowners to search for and find solar energy incentives in their individual state and across the country.

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