What’s the difference between a solar tax credit and a rebate?

Tax credits and rebates: You've probably seen both terms thrown around when researching solar. At first glance, they might seem interchangeable—both put money back in your pocket when you go solar. But they work in fundamentally different ways, arrive at different times, and have different eligibility requirements.

Understanding these differences isn't just academic. The type of incentive available to you can influence which solar financing option makes the most sense, when you'll see your savings materialize, and ultimately how much you'll save over your system's lifetime. 

Here's what you need to know about tax credits versus rebates and how to make the most of both.

A tax credit is a dollar-for-dollar reduction of your tax bill that you claim when filing your annual taxes. Unlike a tax deduction, which reduces your taxable income, a tax credit directly reduces what you owe to the IRS.

For example, if you owe $9,000 in taxes and can claim a $5,000 solar tax credit, you'll only owe $4,000 for that tax year.

Tax credits for solar are typically nonrefundable, meaning you won't receive a separate check for your savings—the credit simply reduces your tax liability. If you don't have a large enough tax bill to claim the full credit in one year, you can typically carry it forward to future years until you've claimed the full amount.

The federal solar tax credit

Historically, the federal solar investment tax credit (ITC) has allowed homeowners to claim 30% of their solar installation costs as a credit toward their federal tax bill. "The solar ITC should be filed with the tax return for the year in which the system was installed," said Gary Massey, a certified public accountant and founder of Massey and Company, a CPA firm. "There may be local incentives as well, but you need to check with the state or city you live in."

However, Congress recently passed legislation terminating the residential solar tax credit (Section 25D of the U.S. Tax Code) at the end of 2025. While the credit remains available for systems installed by December 31, 2025, most solar installers have reached capacity and cannot take new customers who need installation completed this year. For most homeowners, this means the federal tax credit is no longer a realistic option.

If you are able to install solar before the end of 2025, but you don't have a large enough tax bill to claim the full credit in one year, don’t worry: You can carry any unused credit forward indefinitely. "Unused credits can be carried forward, but you want to make sure to file a return for the year of installation," Massey noted.

A rebate provides direct cash back when you purchase renewable energy products. Unlike tax credits, which reduce your tax bill when you file, rebates typically arrive within weeks or months of your installation—and sometimes even reduce your upfront costs.

State governments, local utilities, and sometimes manufacturers offer rebates to encourage clean energy adoption. The amount and structure vary by location, but rebates generally fall into these categories:

• Upfront rebates: You receive a set amount of cash back shortly after installation, reducing your out-of-pocket costs

• Capacity-based rebates: You receive a fixed amount per kilowatt of solar capacity installed

One advantage of rebates over tax credits is timing—you get money back quickly rather than waiting until tax season. Additionally, some rebate programs offer enhanced savings for low- and moderate-income households, making solar more accessible regardless of tax liability.

While both incentives reduce your solar costs, they work in fundamentally different ways:

The key difference comes down to timing and structure. Tax credits work best if you have a substantial tax bill and can wait until you file to realize your savings. Rebates provide faster, more immediate financial relief and don't require tax liability to benefit.

Understanding the difference between tax credits and rebates helps you make smarter decisions about your solar investment. 

Many states offer their own tax credits and rebates that stack on top of any federal incentives you can claim. Your local utility might provide additional rebates, and some manufacturers offer cash-back programs. When you combine multiple incentives from different sources, your total savings can add up quickly.

The key is knowing what's available in your area and understanding which financing option—cash purchase, loan, or lease/PPA—lets you capture the maximum benefit based on your tax situation and financial goals.