The Federal Investment Tax Credit (ITC) for Solar

The Federal Investment Tax Credit (ITC) for solar energy is one of the most significant financial incentives available to encourage adoption of solar power in the United States. Let me walk you through how it works, and what it means for homeowners and businesses.

What is the Solar Investment Tax Credit?

The Solar ITC is a federal tax credit that allows you to deduct a percentage of the cost of installing a solar energy system from your federal taxes. Unlike a deduction that reduces your taxable income, a tax credit reduces the amount of tax you owe dollar-for-dollar.

Current ITC Rates and Timeline

As of March 2025, the Inflation Reduction Act of 2022 (IRA) has established the following rates:

30% tax credit for systems installed between 2022 and 2032
26% tax credit for systems installed in 2033
22% tax credit for systems installed in 2034
0% tax credit for residential installations after 2034 (commercial and utility projects will receive a permanent 10% credit)

What the ITC Covers

The tax credit applies to:

Solar photovoltaic (PV) panels
Solar water heating systems (excluding those for swimming pools or hot tubs)
All equipment costs (panels, inverters, mounting equipment, wiring)
Labor costs for installation
Energy storage devices charged by the solar system (like batteries)
Sales taxes on eligible expenses

Eligibility Requirements

To qualify for the solar ITC:

You must own the solar system (not lease it)
The system must be installed at your primary or secondary U.S. residence, or for commercial property you own
The system must be new or being used for the first time (no previously used equipment)
The system must meet all applicable fire and electrical code requirements - Our Del Sur Energy team is certified by Tesla, Enphase, SolarEdge, and Franklin, ensuring all our solar and battery installations meet these requirements.

How the Credit Works in Practice

Let's walk through an example to illustrate how this works:

Imagine we install a new residential solar system costing $20,000 in 2025:

You're eligible for a 30% tax credit: $20,000 × 30% = $6,000
If your federal tax liability for the year is $7,000, you can claim the full $6,000
This reduces your tax bill to $1,000

But what if your tax liability is less than your credit? For instance, if you only owe $4,000 in federal taxes:

You can claim $4,000 of your $6,000 credit this year
The remaining $2,000 can be carried forward to the next tax year

The ability to carry forward unused credits is especially valuable for retirees or others with lower tax liabilities.

How to Claim the Solar ITC

To claim the federal solar tax credit:

Confirm your eligibility with a tax professional
Keep all receipts and documentation related to the costs
Complete IRS Form 5695 "Residential Energy Credits" when filing your taxes
Calculate your credit on Form 5695 and enter it on your 1040 form

Long-term Financial Impact

The solar ITC significantly improves the economics of going solar. For a $20,000 system with a 30% credit:

The effective cost becomes $14,000 after the tax credit
This can shorten the payback period by several years
The lifetime return on investment increases substantially
Combined with local incentives and net metering, the financial case becomes even stronger

Historical Context and Future Outlook

The solar ITC was originally established by the Energy Policy Act of 2005. It was set to expire in 2007 but has been extended multiple times. The Inflation Reduction Act of 2022 provided the most recent extension and expansion, creating long-term certainty for the solar industry.

Have more questions? Feel free to reach out to matt@delsurenergy.net and he will happily answer any of your questions.

Save 30% with the Federal Investment Tax Credit for Solar