What Happened to the 26 Solar Tax Credit?

The federal incentive for installing solar power, officially named the Residential Clean Energy Credit, has evolved. Homeowners asking about a 26% credit are referencing a rate that was in effect for property placed in service during 2020 and 2021. The credit percentage has fluctuated over the years to encourage homeowner investment in clean energy technologies.

A significant change occurred with the passage of the Inflation Reduction Act of 2022. This legislation retroactively increased the credit to 30% for qualifying systems installed from the beginning of 2022. While this 30% rate is scheduled to continue through 2032, legislation passed by the House of Representatives in May 2025 proposes to shorten this period, potentially ending the credit after 2025. This bill has been sent to the Senate for consideration. Following the 30% period, the credit value is scheduled to decrease to 26% for property placed in service in 2033 and then to 22% in 2034, after which it is set to expire.

Taxpayer and Property Eligibility

To qualify for the Residential Clean Energy Credit, a taxpayer must own the home where the clean energy equipment is installed; renters are not eligible to claim the credit. This ownership rule applies regardless of how the system is financed, whether through a cash purchase or a loan.

The property itself must serve as the taxpayer’s residence and be located in the United States. This includes both a primary home and a second home, such as a vacation property. However, the credit does not extend to residential properties that are solely used for rental purposes and not occupied by the owner for any part of the year.

A requirement for the equipment is that it must be new. The credit is intended for the original installation of clean energy property, meaning that used or previously installed equipment does not meet the criteria. The system must be placed in service for the first time with the eligible property.

Qualifying Expenses and Credit Calculation

Calculating the Residential Clean Energy Credit begins with tallying all qualifying expenses and multiplying them by the applicable credit percentage. The resulting figure is a dollar-for-dollar reduction of your federal income tax liability. There is no upper limit on the total cost that can be used to calculate the credit during this period.

Eligible costs encompass a wide range of expenditures, including:

• Solar panels or photovoltaic shingles.
• Inverters, wiring, mounting equipment, and other hardware needed to connect the system.
• Labor costs for on-site preparation, assembly, and original installation.
• Fees paid for necessary permits and inspections.
• The cost of battery storage technology with a capacity of at least 3 kilowatt-hours (kWh).

Certain expenses cannot be included. For instance, if a roof needs structural repairs or replacement before solar panels can be installed, the costs for that roofing work are not eligible. The credit is strictly for the clean energy property and its direct installation, not for improvements to the home’s structure.

How to Claim the Residential Clean Energy Credit

To claim the credit, taxpayers must complete and file IRS Form 5695, Residential Energy Credits, with their annual Form 1040 federal tax return. This form is used to calculate the credit amount based on the qualifying expenses incurred during the tax year.

The process on Form 5695 involves entering your total qualifying expenses for the solar electric property. After calculating the final credit amount, the result is transferred to Schedule 3 (Form 1040), Additional Credits and Payments.

The credit is nonrefundable, which means it can reduce your tax liability to zero, but you will not receive any portion of it back as a refund beyond that point. If the calculated credit is larger than your tax liability for the year, the unused portion is not lost. The Residential Clean Energy Credit has a carryforward provision, allowing you to apply the remaining amount to reduce your taxes in future years.