As more homeowners turn to renewable energy solutions, one of the most common questions is whether solar panels are tax deductible. The good news is that installing solar panels can offer significant tax savings.
With the Residential Clean Energy Credit, homeowners can receive a substantial credit on the cost of their solar energy system. This makes the transition to clean energy not only environmentally friendly but also financially beneficial.
In this article, we’ll explore how the tax credit works, eligibility requirements, and additional state and local incentives that can help reduce the cost of going solar.
Key Takeaways
- The Residential Clean Energy Credit (RCEC) offers homeowners a 30% federal tax credit on the cost of installing solar systems, including equipment, labor, and permitting fees.
- Homeowners must own their solar system, and it must be installed at a primary or secondary residence in the U.S. to be eligible for the credit.
- Additional state and local incentives, such as New York's Solar Energy System Equipment Credit and the NY-Sun Megawatt Block Program, can further reduce the cost of going solar.
- Tax exemptions like sales tax exemptions and the Clean Energy Systems Exemption can help lower upfront costs and prevent higher property taxes due to solar installation.
What is the Residential Clean Energy Credit (RCEC)?
The Residential Clean Energy Credit (RCEC) is a federal tax credit that helps homeowners offset the cost of installing renewable energy systems, such as solar panels, battery storage, wind turbines, and geothermal heat pumps.
Previously, both residential and commercial solar installations were covered under the Investment Tax Credit (ITC). However, with the passage of the Inflation Reduction Act of 2022, the residential portion was renamed the Residential Clean Energy Credit, while the ITC continued to apply to commercial projects.
As of 2025, the RCEC allows homeowners to claim 30% of the total cost of their solar installation as a tax credit. This credit will remain at 30% through 2032, then decrease to 26% in 2033 and 22% in 2034 before potentially expiring.
The RCEC is nonrefundable, meaning it can reduce your federal tax liability to zero, but you won’t receive a refund for any excess amount.
How Does the Residential Clean Energy Credit Work?
The Residential Clean Energy Tax Credit works by allowing homeowners to claim 30% of the total cost of eligible clean energy system installations, including equipment, labor, and permitting fees, against their federal income tax.
There is no maximum limit on the amount you can claim. Whether you spend $10,000 or $100,000, you can still receive 30% back in tax credits. For example, if your total solar installation cost is $20,000, you would qualify for 30% of $20,000 = $6,000 tax credit. If you owe $5,000 in federal taxes, you can use $5,000 of the credit this year and carry over $1,000 to the next year.
If you’re hesitant to go solar because of the upfront investment, this tax credit can significantly reduce your net cost, making the transition more accessible and financially appealing.
Eligibility Requirements for the Residential Clean Energy Credit (RCEC)
To qualify for the RCEC, you must meet the following requirements:
- You must own the renewable energy system. If you lease the system or have a Power Purchase Agreement (PPA), you are not eligible for the credit.
- The system must be installed at your primary or secondary residence in the U.S. (Rental properties do not qualify unless you also live there part-time.)
- The credit applies to new installations of solar photovoltaic panel systems, solar water heaters (must be certified by the Solar Rating and Certification Corporation), battery storage systems (must have at least 3 kWh capacity), geothermal heat pumps (must meet ENERGY STAR® requirements), and fuel cells (for primary residences only, with at least 0.5 kW capacity).
How to Claim the Residential Clean Energy Credit
Follow these steps to claim the credit when filing your taxes:
- Gather required documents, such as receipts and invoices for equipment and installation costs, manufacturer certification (if required for eligibility), and proof of homeownership (e.g., mortgage statement, property tax bill).
- Complete IRS Form 5695. Fill out Part I to calculate your credit (30% of system cost) and transfer the credit amount to Schedule 3 of your Form 1040.
- Apply the credit to your tax liability. The credit reduces your federal tax bill. If the credit exceeds your tax owed, the unused portion carries over to future tax years.
- Submit Form 5695 with your Form 1040 when filing your federal tax return. If you’re unsure, consult a tax professional to maximize your savings.
State and Local Solar Incentives
Federal, state, and local incentives can significantly reduce the upfront cost of installing solar panels. In addition to the 30% Residential Clean Energy Credit, states like New York offer specific incentives, such as the Solar Energy System Equipment Credit and the NY-Sun Megawatt Block Program, which further reduce the overall cost of your solar system and help you save more over time.
New York Solar Energy System Equipment Credit
In New York, you may be eligible for the Solar Energy System Equipment Credit if you have purchased solar energy system equipment, entered into a written agreement for the lease of solar equipment, or signed an agreement to purchase power from solar energy equipment that is not owned by you, provided the agreement spans at least ten years.
The system must use solar radiation to generate energy for heating, cooling, hot water, or electricity for residential use and must be installed at your principal residence in New York State.
The state tax credit is worth 25% of your qualified solar energy system expenditures, with a maximum of $5,000. While this credit is not refundable, any excess amount beyond your tax liability can be carried forward for up to five years.
NY-Sun Megawatt Block Program
The NY-Sun Megawatt Block Program offers financial incentives for solar installations across residential, nonresidential, and large commercial and industrial projects throughout New York State. The program is divided into regions, and each region is further broken down into "blocks," with each block receiving a designated allocation of megawatts (MW) eligible for incentives.
Incentives are available for areas like ConEdison, Long Island, and Upstate, as well as specific initiatives such as the Community Adder, Inclusive Community Solar Adder, and Statewide Solar for All Adder. Additionally, the Prevailing Wage Adder helps support projects that meet certain labor standards.
As each block fills up, the incentives for that block are no longer available. The program is designed to phase out incentives over time as the solar market becomes more self-sustaining, with the goal of decreasing reliance on incentives as market conditions improve. Real-time information on current incentive levels by region and sector is available through the MW Block Dashboards, allowing participants to track the availability of incentives.
The NY-Sun program is structured to provide support where it’s needed most, ensuring that solar energy becomes more accessible across New York State while eventually reducing the need for incentives as the market matures.
New York City Property Tax Abatement (PTA)
New York City offers a Property Tax Abatement (PTA) to building owners who install a grid-connected solar energy system. If you place a solar system into service between January 1, 2024, and January 1, 2034, you can benefit from a four-year tax abatement.
This abatement provides 7.5% of the installed cost of the solar system each year, for a total of 30% over the four years. Abatements are applied after the NY-Sun Incentive and capped at $62,500 per year or $250,000 total. This tax abatement is spread equally over four years and may not exceed your property tax liability for any given year.
Net Metering
In New York, net metering allows homeowners to sell excess electricity back to the grid, earning credits on their utility bills. These credits are applied at the full retail electricity rate, which averages 19.30 cents per kilowatt-hour (kWh).
For example, if you produce 200 kWh of excess energy, you’d receive a credit of $38.60 on your bill. Over the course of a year, this could add up to $463.20 in credits, helping reduce your annual electricity costs.
The Clean Energy Systems Exemption
The Clean Energy Systems Exemption is a New York State initiative designed to encourage the installation of renewable energy systems, such as solar panels, by providing a property tax exemption. This exemption ensures that the increase in your home's value due to the installation of a solar energy system will not result in higher property taxes.
Under this exemption, the value added to your home by the solar installation is excluded from the taxable value of your property. This means that even though your property may increase in value due to the solar system, you won’t have to pay higher property taxes on that increased value.
Tax Exemptions for Home Solar Power
Homeowners in New York can benefit from exemption from sales tax on the purchase of solar panels, related equipment, and installation costs. This exemption means that when you purchase a residential solar power system in New York, you will not be required to pay the state’s sales tax, which is typically 4%.
This reduction in the overall cost of the system helps make solar energy more affordable, lowering the total investment required to install a solar system on your home.
Let’s Recap
The Residential Clean Energy Credit makes solar installations more affordable by offering significant tax savings, and with the added support of state and local incentives, it's an ideal time for homeowners to invest in home improvements that reduce energy costs. Not only can you reduce your federal tax liability, but you can also benefit from property tax exemptions and sales tax reductions, making the transition to solar more financially accessible.
Why Choose Rivertown Solar?
Rivertown Solar specializes in providing top-quality solar installations that enhance energy efficiency and deliver long-term savings. Our expert team customizes each solar system to meet your home’s unique energy needs, ensuring optimal performance and maximum return on investment.
Using premium materials and advanced technology, we guarantee lasting value with every installation. We focus on customer satisfaction by delivering superior craftsmanship, ensuring your solar system is safe, efficient, and compliant with all electrical codes.
Ready to start saving on energy costs and contribute to a cleaner, more sustainable future? Contact Rivertown Solar today for a free consultation and take the first step towards making the switch to solar.
FAQ
What is the Federal Solar Tax Credit?
The federal solar tax credit, now known as the Residential Clean Energy Credit, allows you to claim a 30% credit on the cost of installing solar systems, including panels and related equipment, to reduce the tax you owe.
Who qualifies for the Residential Clean Energy Credit?
Homeowners who install solar panels on their primary or secondary residence are eligible for the Residential Clean Energy Credit.
Does the credit apply to battery storage?
No, the solar credit does not apply to standalone battery storage systems. However, local incentives may be available for battery storage in your area.
Am I able to claim the solar tax credit if I lease my solar panels?
No, you can only claim the tax credit (RCEC) if you own the solar system. If you lease your solar panels or enter into a Power Purchase Agreement (PPA), you are not eligible.
Which tax form do I use to claim the Residential Clean Energy Credit?
To claim the Residential Clean Energy Credit, you must fill out IRS Form 5695, calculate your credit, and then transfer the amount to Schedule 3 of your Form 1040.