The federal solar tax credit represents the most prevalent solar incentive available in the United States. All U.S. taxpayers who invest in a solar installation are entitled to receive 30% of the installation cost back as an income tax credit in the subsequent year.
If you are considering the installation of solar panels, it is essential to understand how the tax credit functions, its potential value to you, and its integration with additional solar incentives. Let us explore this in greater detail.
How does the federal solar tax credit work in 2025?
In 2025, the federal solar tax credit is 30% of the cost of solar installations, which directly lowers your federal income tax bill.
For example, if you installed a home solar power system for $20,000, you could claim a tax credit of $6,000.
$20,000 installation cost X 30% = $6,000 tax credit
If your tax bill was $15,000, the $6,000 tax credit would lower what you owe to $9,000.
$15,000 tax bill – $6,000 tax credit = $9,000 final payment
The tax credit is nonrefundable, which means it cannot bring your tax bill below $0, and the government won’t refund excess credit. However, any leftover credit can be used in the next tax year if your credit amount is more than what you owe.
Here’s another example: If you installed the same system and received a $6,000 tax credit but owed only $5,000, your tax bill would drop to $0. The remaining $1,000 can be applied to next year’s taxes.
$5,000 tax bill – $6,000 credit = $1,000 carry-over to next year’s taxes
Depending on what you owe and how much you withheld for the year, you may see a higher tax refund when you claim the federal solar tax credit, depending on what you owe and how much you withheld for the year.
If you have already withheld enough money from your paychecks to cover what you owe, you will earn whatever refund you would usually get when filing your taxes, plus the tax credit value.
Kleczynski provided SolarReviews with an example to illustrate how the solar tax credit could impact a federal tax return:
“Let’s say you earned a tax credit of $6,000. If you owed $20,000 in taxes but withheld $25,000 throughout the year on your paychecks, your refund would be $11,000: $6,000 from the federal tax credit and $5,000 from the income taxes.”
However, you won’t always get the tax credit back in your refund check. If you didn’t withhold enough money throughout the year to cover your liability, the credit will simply lower your liability.
Our calculations for the average cost of solar panels show you should expect to pay $21,816 for a typical 7.2-kilowatt system. That means the average solar tax credit is $6,544 (30% of $21,816).
However, your solar tax credit will vary based on how much you spend on solar and your tax liability. Liability simply means how much you owe in total income taxes for the year.
Remember that the federal solar tax credit won’t be around forever! The solar tax credit is on a step-down schedule, meaning its value decreases until it expires completely in 2035. So, a $20,000 solar system installed in 2025 will earn a credit of $6,000, while that same system will only earn a $5,200 tax credit in 2033. @SolarReviews
The federal solar tax credit is a dollar-for-dollar income tax credit equal to 30% of solar installation costs.
