Federal solar tax credit in 2025: How does it work?

The federal solar investment tax credit (ITC)—Section 25D of the U.S. Tax Code—expires for customer-owned residential solar systems installed after December 31, 2025. For most homeowners, that means this credit is no longer accessible due to limited installer capacity heading into year-end. However, the credit remains available indirectly through third-party owned systems, like solar leases and power purchase agreements (PPAs), where the system owner can still claim the commercial solar tax credit—Section 48E of the U.S. Tax Code—and can pass those savings to you through lower rates.

But most importantly, solar remains a financially sound long-term investment. The savings from reduced electric bills over 25-30 years typically provide strong returns regardless of federal tax incentives.

We'll walk you through what you need to know about the federal solar tax credit, how to qualify if installation is still possible this year, and why solar continues to make financial sense for most homeowners.

Disclaimer: This article is intended to provide an informational overview of the federal solar tax credit for interested homeowners. It is not intended to serve as official financial guidance. Readers interested in installing solar products should use their best judgment and seek advice from a licensed tax professional.

you to claim 30% of the cost of your solar system as a credit to your federal tax bill. For example, if it cost $10,000 to install your solar system, you'd receive a $3,000 credit, which would directly reduce your tax bill.

You can claim the ITC when filing your 2025 taxes if you purchased and installed your solar panel system before December 31, 2025. If you signed a lease or PPA with a solar installer, you are not the system's owner and cannot claim the credit on your taxes.

Different than a rebate or a deduction, the ITC is a dollar-for-dollar reduction of your federal tax bill, directly reducing what you owe in taxes. There is no income limit, so taxpayers in all income brackets are eligible.

But, you need to owe taxes in order to receive a tax credit, so make sure you're receiving a tax bill in 2025 if you want to use your credit for this tax year. If you don't have a large enough tax bill to claim the entire credit in one year, you'll receive credits equal to your tax liability. You can then roll over any remaining credit to future tax years—even after the credit is no longer available for new system owners. 

The ITC's timeline: What changed

The solar tax credit has a long bipartisan history, originally signed into law by President George W. Bush in 2005, extended by President Obama in 2008, extended again by President Trump in 2020, and most recently renewed by President Biden under the Inflation Reduction Act in 2022.

Under the Inflation Reduction Act framework, the tax credit was set to maintain a 30% value through 2032, gradually decrease through 2034, and disappear entirely by 2035.

However, Congressional action in July 2025 slashed this timeline with the One Big Beautiful Bill Act (OBBBA), ending the residential solar tax credit for customer-owned systems nearly a decade ahead of schedule. The tax credit value falls to 0% for customer-owned residential systems on January 1, 2026—with no phase-down period.

However, third-party owned residential solar projects—leases and PPAs—continue to qualify for tax credits if they begin construction before July 2026 or are placed in service by 2028 under the commercial solar tax credit. While homeowners who choose these options don't claim the credit directly, competitive providers typically pass the value through as lower monthly rates.

What is (and isn't) covered by the ITC?

Only certain solar equipment and related expenses are eligible for the 30% tax credit, so make sure to double-check what specific items fall under the ITC before you have anything installed.

What changes without the federal credit?

Without the federal tax credit, your overall solar cost or loan amount will be about 30% higher. Your payback period extends by a few years. But your total savings over the system's lifetime remain substantial for most homes with good solar potential. For most homewoners, you’ll still see net positive savings, an increase in home value, and you’ll achieve energy independence.

And for some homeowners, nothing changes. Those without high enough tax bills—like some retirees and low- and moderate-income households—couldn't fully utilize the federal tax credit anyway. Those signing leases or PPAs can still benefit from tax credits indirectly, since these projects remain eligible, and providers can pass savings through lower rates.

Aside from the ITC, there are many worthwhile state-sponsored rebates and incentives to take advantage of, depending on where you live. For example, if you go solar in Florida you can benefit from its state-specific tax exemptions, such as not having to pay any sales tax on your solar purchase, as well as not having your property taxes increase despite the added value to your home.

Here are some of the financial incentives you can benefit from:

• Rebates from your utility company: Net metering is an example of one of the most common types of credits you can receive from your utility company.

• Net metering: Net metering is a billing mechanism that allows you to receive credits on your utility bill for any excess electricity your solar system generates and sends back to your local grid.

• Rebates from the state: Some states and utility companies offer rebates to directly reduce your cost of solar. Rebates may affect your taxable income, so be sure to consult with a licensed tax professional when claiming local rebates.

• State tax credit: Individual states offer their own solar credits, but policies vary greatly depending on your location.

• Payments from renewable energy certificates (SRECs): Similar to net metering, SRECs allow you to earn money for the electricity your solar panels generate.

You claim the investment tax credit for solar when you file your yearly federal tax return. If you work with an accountant, make sure to let them know you've installed solar on your property in the past year. If you file your own taxes, you can use EnergySage's step-by-step guide for how to fill out IRS Form 5695 to ensure you receive your tax credit.

Here's how to claim the ITC in 2025:

1. Determine if you're eligible: You must own your solar system to qualify for the federal solar tax credit. You also need to have a tax bill in order to receive your federal solar tax credit. If you don't have enough tax liability, you'll have to roll your credit over to the following year.

2. Complete IRS Form 5695: You can use the EnergySage guide for filling out 5695 if you're filing your taxes yourself. Otherwise, make sure you have all of the supporting documentation from your solar installation ready to go for your accountant to file for you.

3. Add to Schedule 3 and Form 1040: Once you've completed IRS Form 5695, you'll need to use some of that information to fill out Schedule 3, which allows you to claim both nonrefundable credits (like the ITC) as well as refundable credits. Once you've also filled out Schedule 3, you'll need to fill out Form 1040, which is the principal form you use to file your tax return.

The federal tax credit helped solar deployment grow nationwide, both at the distributed and utility-scale levels, allowing more businesses, homeowners, and taxpayers to invest in solar while driving down costs and increasing long-term energy stability. According to the Solar Energy Industries Association (SEIA), it has helped the U.S. solar industry expand by more than 200% over the past two decades.

But, the industry will continue adapting as policy changes take effect. Rising electricity costs remain a powerful driver of solar adoption—residential electricity rates have climbed 32% over the past decade, and since 2022, rates have increased faster than inflation, a trend expected to continue through at least 2026. As utility rates climb and solar technology becomes more efficient and affordable, the value proposition for homeowners remains strong regardless of federal incentives.