Decarbonizing our electricity supply means installing a lot of solar panels, some in large arrays and some atop our homes. But getting more U.S. homes to adopt solar isn’t only helpful in curbing greenhouse gas emissions: Distributed solar can also make our power system more resilient, keeping the lights on during extreme weather and when the grid gets strained.
This is especially true in those hot, AC-hungry summer months. “When everyone’s running their AC, you’re actually producing energy and taking the strain off the grid—or even producing more power than you need” with solar panels at home, says Aaron Nichols of solar photovoltaic panel installer Exact Solar. Households can also see big savings on their utility bills.
The decision on whether or not to install solar at home often comes down to finances. Even though the cost of an average residential solar installation has dropped by about $15,000, the cash outlay still adds up enough to give even the most ardent environmentalist pause.
But now, the Residential Clean Energy Credit, updated by the Inflation Reduction Act (IRA), can help lower project costs for homeowners. While you should still consult with a tax professional on how to fold this cash break into your return, here’s a quick rundown of the solar-related benefits that are available
What’s the Residential Clean Energy Credit?
While the IRA created several kinds of financial incentives for various energy efficiency, renewable energy, and transportation projects, the Residential Clean Energy Credit applies to solar panels and solar water heaters. (It applies to other stuff, too, which we get into in this breakdown of all the home efficiency tax incentives currently available to homeowners.)
This incentive in particular is a tax credit, which means you pay for the project out of pocket and have what’s essentially a coupon you redeem to reduce the amount of your annual tax bill, explains Jennifer Amann, a senior fellow in the buildings program at the American Council for an Energy-Efficient Economy. Not everyone can take advantage of tax credits, because they’re only available to folks who owe the government money when they file every April; those who get a refund check have nothing to apply that coupon, or tax credit, toward.
What’s covered?
The credit applies to rooftop solar products—which could be the recognizable photovoltaic panels or the less-common solar tiles or roofing shingles—at both primary and non-primary residences, as long as they’re in the U.S. While solar tiles and shingles, which form part of the structure of the roof, count, the other non-energy-generating parts, like rafters, don’t qualify. Solar water heaters need to meet performance certifications from the Solar Rating Certification Corporation or a comparable entity endorsed by the government of the state in which the property is installed.
How much money is available?
You can apply the Residential Clean Energy Credit to your taxes for up to 30% of the cost of new—not used—solar panels and installation, as long as they’re installed between 2022 and 2032. In 2033, the credit will drop to 26%, and to 22% from 2034, when it expires. There’s no maximum on what that credit can be, so long as it’s matching the percentage for that year.
You can also apply any unused credit to a future year. So, if your tax bill was going to be $10,000 for both 2025 and 2026, and you dropped $25,000 on a solar installation, you could apply $10,000 of the $15,000 on your 2025 tax bill and save the remaining $5,000 for 2026. However, you can’t factor in any interest paid on related project loans.
Am I eligible?
Anyone who has a tax bill large enough to utilize the credit (even over multiple years, in this case) is eligible. You need to file form 5695 with your taxes.
Anything else I should know?
Before you claim a credit, the IRS requires you to first subtract the value of any rebates or utility-provided subsidies you receive, although whether you need to deduct state energy efficiency incentives depends on how your state’s program is structured. But that doesn’t mean you can’t take advantage of any Renewable Energy Credits associated with the solar power you generate.
What about renewable energy credits?
Renewable energy credits (RECs)—also often called renewable energy certificates or solar renewable energy credits (SRECs)—aren’t tax credits. They’re a kind of tradable or sellable token that indicates a certain amount of renewable generation and set a value for the power. Typically one REC is issued for every megawatt-hour of energy produced. RECs are often used by power suppliers to help meet renewable portfolio standards. Individuals in many states can sell RECs from rooftop solar back to the utility. (This is different from net metering, in which a homeowner sells surplus electricity back to the utility in exchange for a credit or discount on power draws down the road.)
Selling an REC takes several steps. First is certifying your energy production and registering with a tracking program in your region. Next is finding a buyer, such as a utility or a company with certain renewable energy goals. In the Northeastern U.S., this can be done by the PJM Bulletin Board. After finding a buyer, transfer takes place via your region’s tracking system.
Though RECs are distinct from net metering, in some states, you can take advantage of both of systems. For example, in Virginia, Dominion Energy customers that are net metering with their solar have the opportunity to sell their RECs on the open market or to Dominion themselves. However, net metering policies are constantly changing state by state, so keep an eye out if you’re keen on this policy.
How do I know if solar is right for me?
The decision to invest in rooftop solar panels can be a complex one, factoring in things like the location of your home, the orientation of your roof, and more. Perhaps the largest consideration, however, is a financial one, and that math can look a little different for everyone. If you’re weighing installing panels on your roof, here’s our guide to start thinking through whether or not solar is right for your home.
What if I can’t install solar where I live?
Community solar projects are an option for those who rent their homes, can’t afford the cost, or otherwise don’t have a property suitable for solar panels, like a very shaded, deeply sloped or old roof. Eric LaMora, the executive director of community solar with Nautilus Solar Energy, calls the concept “the great equalizer for energy equity.” Community solar allows anyone the ability to participate in the energy transition and access renewable sources for their energy,” says LaMora.
To help those who could benefit from community solar, the federal government granted $7 billion to states, territories, tribes, municipalities, and nonprofits. The funded projects are intended to help more than 900,000 low-income and disadvantaged households tap into community solar projects or expand solar accessibility. Here’s a list of all the accepted project and program applications that those funds will be going to.