Solar Tax Credit 2026: What Happened to the 30% Residential Clean Energy Credit

The Misconception That Is Costing Homeowners Money

When the OBBBA was signed in July 2025, news coverage understandably focused on what was being eliminated. The result: a significant share of homeowners who installed solar in 2025 either delayed their projects unnecessarily or — worse — are now filing their tax returns without claiming a credit they fully earned.

The IRS has been clear: the credit applies to the tax year in which the qualified property is placed in service, meaning installed and operational. The date the law changed is irrelevant to 2025 installations. A system turned on November 15, 2025 generates the same 30% credit as one turned on January 2, 2025. The deadline was December 31, 2025, and Congress did not make that retroactive.

According to the Solar Energy Industries Association (SEIA), approximately 4.7 million U.S. homes had solar installed as of Q3 2025. Roughly 800,000 new residential systems were installed in 2025 alone. That is 800,000 households potentially sitting on unclaimed credits averaging $6,000 each.

How the 30% Credit Worked: The Basics

What “30% of Costs” Actually Means

The credit equals 30% of your total out-of-pocket costs for the qualified system — not just the equipment. The IRS specifically allows the following to be included in the basis:

• Solar panels and racking: The panels themselves and mounting hardware
• Inverter(s): String inverters, microinverters, or DC optimizers
• Labor costs: Installation, wiring, electrical upgrades required for the installation
• Permitting and inspection fees: Local permit costs are eligible
• Battery storage: If installed at the same time as solar (or independently, per IRS Notice 2023-29)
• Sales tax: State and local sales tax on the above items

What is not included: roof repairs or replacement required before installation, unless the roof itself is part of the solar system (e.g., solar shingles like Tesla Solar Roof qualify). A new standard asphalt roof to support the panels does not increase your credit basis.

Non-Refundable With Indefinite Carryforward

The Section 25D credit is non-refundable — it can reduce your federal income tax liability to zero, but it cannot generate a refund beyond that. However, the IRS allows any unused credit to carry forward to subsequent tax years with no expiration. This is a critical point for taxpayers with modest tax liability.

Example: A retired couple with $15,000 in federal tax liability installs a $35,000 solar system in October 2025. Their credit is $10,500 (30% × $35,000). They apply $10,500 against their $15,000 liability in 2025, reducing taxes owed to $4,500 (after the credit). Wait — there is no excess here. But if their liability were only $8,000, they would apply $8,000 in 2025 and carry forward $2,500 to their 2026 return.

What Qualifies for the Residential Clean Energy Credit

Solar panels are the most common use case, but Section 25D covered a broader range of clean energy technologies installed at a U.S. residence. Here is the complete list of eligible property types and their credit rates:

Note on fuel cells: unlike the other technologies, fuel cell property must be installed at your primary residence — vacation homes and second properties do not qualify. All other technologies above are eligible at any U.S. residence you own and use.

The Real Math: What a Typical System Credit Looks Like

Scenario 1: Standard 7 kW Solar Install

According to EnergySage's 2026 marketplace data, the national average solar installation costs $2.85 per watt installed, meaning a typical 7 kW system runs about $19,950 before incentives. At 30%, the federal credit is $5,985. After-credit cost: approximately $13,965.

If this homeowner also adds a Tesla Powerwall (13.5 kWh battery) at an installed cost of $12,000, the battery is also 30% eligible under the expanded rules per IRS Notice 2023-29, adding another $3,600 in credit. Total combined credit: $9,585 on a $31,950 system — bringing the net cost to roughly $22,365.

Scenario 2: Higher-Cost Market (Massachusetts)

In Massachusetts, SolarQuest AI reports the average cost at $3.60 per watt — 26% above the national average due to labor costs and local permitting. A 7 kW system runs $25,200. The 30% credit: $7,560. After the credit, the homeowner pays $17,640 net.

Massachusetts also offers the Solar Energy System Deduction (up to $1,000) and a state income tax credit of 15% (capped at $1,000). Combined with the federal credit, total incentives on a $25,200 Massachusetts install could exceed $9,500.

What If My Credit Exceeds My Tax Liability?

This is a common situation for retirees and lower-income households. The solution is the carryforward. You do not lose a dollar — the unused credit rolls to the next year. Here is what that looks like:

Example assumes $31,950 system, $9,585 total credit. Numbers for illustration only.

How to Claim It: IRS Form 5695 Line by Line

To claim the Residential Clean Energy Credit, you must file Form 5695 (Residential Energy Credits) along with your Form 1040. The form is straightforward — Part I covers the Residential Clean Energy Credit (solar and the other technologies above), and Part II covers the separate Energy Efficient Home Improvement Credit.

Here is what you fill in on Part I of Form 5695 for a typical solar installation:

• Line 1: Solar electric property costs (the total you paid for the PV system)
• Line 2: Solar water heating costs (if applicable)
• Line 5: Battery storage technology costs (if applicable)
• Line 6b: Carryforward credit from prior year (if any)
• Line 13: Total credit amount (sum × 30%)
• Line 14: Your tax liability from your return
• Line 15: Credit applied this year (lesser of lines 13 and 14)
• Line 16: Carryforward amount (if line 13 exceeds line 14)

The computed credit flows from Form 5695 Line 15 to Schedule 3 (Form 1040), Line 5. Most tax software handles this automatically once you enter your installation costs.

Documentation You Should Keep

The IRS does not require you to attach receipts to your return, but you should retain documentation for at least three years in case of audit:

• Installer invoice showing itemized costs (equipment, labor, permits)
• Proof of payment (bank statements, credit card records)
• Interconnection agreement or utility permission-to-operate (PTO) letter, establishing the “placed in service” date
• Local building permit and inspection certificate
• For solar water heaters: SRCC (Solar Rating & Certification Corporation) certification document

Situations Where the Credit Gets Complicated

Home Used Partly for Business

If you claim a home office deduction, the solar credit calculation is pro-rated. The portion of your home used as a qualifying home office is treated as business property, not residential. The business portion of the solar cost qualifies for a separate credit or deduction under business energy rules; only the personal-use portion qualifies under Section 25D.

Example: Your home office is 15% of your home's square footage. Your solar installation costs $20,000. Only 85% ($17,000) qualifies for the residential credit ($5,100). The remaining 15% ($3,000) may qualify under Section 48E commercial rules — consult a tax professional for this calculation.

New Construction

Solar systems installed on new construction do qualify for Section 25D, but only if the homeowner is purchasing the home (the credit applies to the original purchaser). Builders who install solar as part of construction cannot pass the credit to buyers after the fact — the buyer must claim it based on their purchase price allocation or separately contracted solar costs.

Financed Systems

Financing method does not affect eligibility. Whether you paid cash, used a home equity loan, took out a solar-specific loan, or financed through the installer, the total installed cost is the basis for the credit — not what you have actually paid back on the loan. This is because the credit is based on the cost of the property, not your cash outflow.

One caveat: if you use a PACE loan (Property Assessed Clean Energy), consult with a CPA. The credit calculation and timing can differ since PACE is attached to the property rather than the borrower.

What About New Installations After December 31, 2025?

The residential credit is gone for new 2026 and beyond installations. But the picture is not entirely bleak:

Third-Party Owned Systems (Leases and PPAs)

Homeowners who sign solar leases or power purchase agreements are using installer-owned equipment. That installer can claim the Section 48E commercial Investment Tax Credit (30%) through at least 2027 under current law — and competition typically forces installers to pass some portion of that benefit into lower lease rates or locked-in electricity prices. The savings are real, just indirect.

State and Utility Incentives

The federal credit's expiration does not affect state programs. As of early 2026, several states maintain meaningful incentives:

• California: Net Energy Metering 3.0 and various utility rebates; SGIP battery storage incentive
• Massachusetts: SMART program (Solar Massachusetts Renewable Target) — monthly payments per kWh generated
• New York: NY-Sun Megawatt Block incentive plus 25% state tax credit (capped at $5,000)
• Maryland: Residential Clean Energy Grant Program
• Colorado: Utility rebates through Xcel Energy and others

Check your state energy office and utility provider — the federal credit's expiration has prompted several states to expand their own programs to compensate.

Interaction With Other Credits and Deductions

The Residential Clean Energy Credit works alongside other tax benefits, but there are interaction rules worth knowing:

• State tax rebates: If your state provides a rebate for solar installation, it generally reduces your basis for calculating the federal credit. A $2,000 state rebate on a $20,000 system means your federal credit is based on $18,000 ($5,400), not $20,000.
• Utility rebates: Utility company rebates are typically excluded from gross income under Section 136 and do not reduce your federal credit basis — only state government subsidies do.
• Tax-exempt entities: Churches, nonprofits, and government bodies cannot claim the residential credit (they have no tax liability), but they may be eligible for direct payment equivalents under Section 6417 — a separate IRA mechanism that survived the OBBBA.

For a broader picture of available tax credits versus deductions and how each affects your bottom line, see our overview on the mechanics of each benefit type.

The Strategic Play for 2025 Filers

If you installed solar in 2025 and your credit exceeds your current-year liability, the smartest move is to check your withholding or estimated tax strategy for 2026 and 2027 with the carryforward in mind. If you are carrying $4,000 forward to 2026, it may make sense to reduce W-4 withholding by a corresponding amount — essentially accessing that credit value in your paycheck earlier.

Conversely, if you were considering a Roth conversion, converting additional IRA funds in a year where a solar carryforward will offset the tax can be highly efficient. The conversion creates ordinary income, the carryforward eliminates the resulting tax — net cost: zero federal tax on the conversion.

Use the LevyIO tax calculator to model your total liability with and without the solar credit applied, and see how much carryforward you can expect.

Frequently Asked Questions

Is the solar tax credit still available in 2026?

The Residential Clean Energy Credit (Section 25D) expired for new installations placed in service after December 31, 2025, under the One Big Beautiful Bill Act. If your solar system was installed and operational by December 31, 2025, you can still claim the full 30% credit on your 2025 tax return using Form 5695. Unused credit from 2025 can carry forward to your 2026 return.

How much is the solar tax credit worth?

The credit equals 30% of the total installed cost — including panels, inverter, labor, wiring, and permitting. For the average U.S. solar installation of $20,000 (EnergySage, 2026), that is a $6,000 federal tax credit. The credit reduces your tax bill dollar-for-dollar and is non-refundable, but unused amounts carry forward indefinitely.

What IRS form do I use to claim the solar tax credit?

File IRS Form 5695 (Residential Energy Credits) attached to your Form 1040. Part I of Form 5695 covers the Residential Clean Energy Credit (solar, wind, geothermal, fuel cells, battery storage). You must claim the credit for the tax year the system is placed in service — not the year you signed the contract or made a deposit.

Does the solar tax credit carry forward if I do not owe enough tax?

Yes. Any unused portion of the Section 25D credit carries forward to subsequent tax years indefinitely. For example, if your 2025 credit is $8,000 but your tax liability is only $5,000, the remaining $3,000 carries to your 2026 return and beyond until fully used.

Does a solar lease or PPA qualify for the 30% credit?

No. You must own the solar system to claim the residential credit. If you lease panels or enter a power purchase agreement (PPA), the installer owns the equipment and claims any tax benefits — not you. That said, lease and PPA pricing often reflects the installer's own ITC savings passed through to customers.

Does battery storage qualify for the solar tax credit?

Yes — battery storage with a capacity of at least 3 kilowatt-hours qualifies for the full 30% credit, even when installed independently of solar panels. A typical home battery like the Tesla Powerwall (13.5 kWh) at $12,000 installed generates a $3,600 credit.

Can I claim the solar tax credit on a vacation home?

Yes, for the personal-use portion. The credit applies to any U.S. residence you use — including vacation homes. However, if the property is rented out, only the percentage of the year you personally occupy it qualifies. Rental property that you never personally use does not qualify for Section 25D.

What was the credit rate before the OBBBA eliminated it?

The Inflation Reduction Act of 2022 established a flat 30% credit through 2032, then scheduled phase-downs to 26% in 2033 and 22% in 2034. The OBBBA overrode that schedule and ended the credit for property placed in service after December 31, 2025 — seven years ahead of the IRA timeline.