Solar Tax Credits Explained: How Homeowners Can Save Big in 2025

Solar Tax Credits Explained: If you’re a homeowner in the United States considering installing solar panels, battery storage, or other renewable energy upgrades, 2025 presents a pivotal window of opportunity. The federal solar tax credit—commonly known as the Residential Clean Energy Credit under Internal Revenue Code Section 25D (“Section 25D”)—offers substantial savings on your tax bill. However, changes on the horizon mean timing, understanding eligibility, and taking action matter more than ever.

In this detailed article, you’ll learn how the solar tax credit works in 2025, what counts toward the credit, how to claim it, key deadlines and changes coming, real-life examples of savings, and answers to common homeowner questions. By the end, you’ll be equipped to make an informed decision on whether to go solar this year—and how to maximise the savings while staying compliant.

How the Solar Tax Credit Works

What is the Residential Clean Energy Credit (Section 25D)?

The Residential Clean Energy Credit (also referred to as the “solar tax credit” in common parlance) allows U.S. homeowners who purchase qualified solar energy systems to deduct a significant portion of the installation and equipment costs from their federal income tax liability.

Specifically:

The credit applies to eligible expenditures on a solar energy system installed in your home.
The homeowner must own (not lease) the system for the credit if claiming under Section 25D.
The property must be located in the U.S., must be a residence (new or existing), and the system must be “placed in service” by the deadline.

What portion of the costs is eligible?

As of 2025, homeowners can claim 30 % of their qualified solar system costs as a tax credit. For example, if you spend $25,000 on a qualifying system, you may deduct $7,500 from your federal income tax liability.

Eligible costs include: equipment (solar panels, inverters, mounting/racking), labor costs for installation, wiring, and associated permitting.

Key eligibility criteria

To claim the credit in 2025, you must meet the following:

You must own (or are purchasing) the solar system—not simply leasing it (though some third-party arrangements have separate rules).
The system must be installed at your residence (your primary or secondary home) located in the U.S.
The system must be “placed in service” (i.e., installed, inspected, approved, connected to the grid) by December 31, 2025 for homeowners to secure the full 30% credit under Section 25D.
You must have a federal income tax liability; the credit reduces tax owed—unused portions may carry forward.

What’s Changing in 2025 – Why Timing Matters

2025 is a crucial year for homeowners planning solar because several major changes are underway.

Deadline and expiration

Under recent legislation, the federal solar tax credit for residential homeowners (Section 25D) is set to expire for new installations placed in service after December 31, 2025. That means any system that is not fully operational by that date may not qualify for the 30% credit.

What this means in practice

If you sign a contract in 2025 but the solar system is not installed, inspected and connected by December 31, you could lose the credit for your tax year.
Monitoring local permitting and utility interconnection timelines is critical. Delays in permitting or utility approval may push the “placed in service” date into 2026, making you ineligible for the full 30 %.
After December 31, 2025, residential homeowners may lose direct eligibility under Section 25D for the solar tax credit—so 2025 is potentially the last full year to qualify.

Additional incentive rules

Although the standard 30 % credit applies now, from 2026 onwards projects may face stricter domestic content rules and other supply chain requirements if still eligible under modified programs.
Battery storage systems that are not installed along with solar may lose eligibility for homeowner-claimed credits after 2025.

Benefits of Claiming the Credit

Significant up-front savings

By reducing your federal tax liability dollar for dollar, the credit lowers your effective cost of solar. Continuing the earlier example: a $25,000 system becomes effectively $17,500 (after $7,500 credit) in federal tax-adjusted cost—before state incentives, rebates or energy bill savings.

Better return on investment (ROI)

Lower upfront cost means a shorter payback period. If your home’s electricity consumption is substantial and you offset utility bills, the tax credit can accelerate breakeven.

Combined with other incentives

The federal credit can often be stacked with state or utility solar incentives, net-metering benefits, and property tax exemptions—further improving financial outcomes.

Sustainability and value increase

Aside from financial savings, installing solar can increase home value, reduce carbon footprint, and hedge against future utility rate hikes. The tax credit makes these benefits more accessible now.

What Qualifies & What Doesn’t

Qualifying expenditures

Eligible costs generally include:

Solar photovoltaic panels and equipment
Installers’ labor costs for procuring and installing the equipment
Wiring, inverters, mounting/racking, monitoring equipment
Battery storage equipment if installed in the same project (and meeting eligibility)

Non-qualifying expenses

Costs that typically do not qualify:

Roof repairs or replacements undertaken solely to support solar (unless they’re integral to mounting the system)
Lighting, shading or general home improvements not directly tied to the solar system
Equipment used for a lease or power-purchase arrangement that is not owned by the homeowner (though tax rules differ)

Example: how costs break down

Let’s say you purchase a home solar system with:

Panels & inverters: $18,000
Mounting and wiring labor: $4,000
Permitting, inspection fees: $1,000
Total eligible cost: $23,000

In 2025 you claim 30% of $23,000 = $6,900 tax credit, reducing your federal tax bill by that amount.

Real-World Example Scenario

Scenario: Homeowner installs a solar + battery system in spring 2025.

Total project cost: $30,000
Solar panels + inverter + battery: $24,000
Labor, wiring, permitting: $4,000
Additional eligible mounting equipment: $2,000
Eligible cost: $30,000
Federal tax credit at 30%: $30,000 × 0.30 = $9,000

Thus, the homeowner reduces their federal tax liability by $9,000 for the installation year. If the homeowner owes only $7,000 in taxes that year, they can carry forward the unused portion of the credit to the following tax year(s).

If the system generates enough electricity to cut utility bills substantially—for instance $1,200/year saved—the combined effect is a significantly improved ROI and lower net cost.

Step-by-Step: How to Claim the Solar Tax Credit

Choose your system and installer – Ensure the equipment and installation date allow the system to be placed in service by December 31, 2025.
Keep documentation – Receipts showing equipment cost, labor and eligible installation costs.
Measure eligibility – Confirm you own the system, installation is at your U.S. residence, and you meet tax liability requirements.
Install and commission – Ensure all inspections, interconnection and permits are completed.
File IRS Form 5695 – For the tax year when the system is placed in service, complete Form 5695 (“Residential Energy Credits”) and attach to your federal tax return.
Carry forward unused credit – If you cannot use the full credit in one year (due to tax liability being less than credit amount), the unused portion may be carried forward to future tax years.
Monitor changes – Because the deadline is December 31, 2025, schedule installations early in the year to avoid delays.

Common Questions (FAQs)

Q1. Can I still claim the 30% credit in 2025?

Yes. If your solar (or qualifying system) is installed and placed in service by December 31, 2025, homeowners can claim the full 30% federal credit under Section 25D.

Q2. What if my system is installed in 2026?

If installation is completed after December 31, 2025, you may not qualify for the residential 30% credit (under current law) for homeowner-owned systems. The credit may be eliminated for new systems after 2025 unless new legislation restores or modifies it.

Q3. Does battery storage qualify?

Yes—but only if installed as part of a qualifying solar energy system and meeting eligibility criteria. After 2025, standalone homeowner-owned battery installations may be ineligible for the homeowner credit (though third-party owned battery systems may still qualify under other rules).

Q4. Can I combine the credit with other incentives?

Yes. You can stack the federal credit with state or local incentives, utility rebates, property tax exemptions, and net-metering benefits. Each state or utility has different rules—check local incentives.

Q5. Does the credit reduce my tax refund?

No. The solar tax credit is a non-refundable tax credit. It reduces your federal tax liability dollar-for-dollar. If your credit exceeds your tax liability for the year, you may carry forward the unused portion to future years.

Q6. What about leased systems or PPAs?

If you lease the system (or enter a power-purchase agreement where you don’t own the system), the tax credit is typically claimed by the third-party owner, not you. Homeowners in those cases should consult their contract and installer for details.

Q7. What happens if I sell my home after installing solar?

If you sell the home, you cannot transfer the tax credit to the buyer—you must have claimed the credit for your tax year. The system must be placed in service in the year you file. Continue to follow proper documentation if you move.

Risks and Things to Watch

Timing risk

Delays in permitting, utility interconnection, inspections or weather can push the “placed in service” date into 2026—possibly disqualifying you from the credit. Early scheduling is crucial.

Tax liability risk

Because the credit is non-refundable, you must have enough tax liability in the year you place the system in service—or carry forward the unused portion. If your tax liability is zero that year and you cannot benefit subsequently, your savings may be limited.

Installer/contractor risk

Working with a reputable installer helps ensure the system meets eligibility rules, avoids unqualified components or poor workmanship, and meets the placed-in-service deadline.

Legislative risk

Though current law establishes the credit through 2025 for homeowners, future legislative changes or interpretations may alter eligibility. Staying informed is important.

Maintenance and performance risk

Even with tax credit savings, solar system performance (shade, orientation, panel degradation, inverter issues) influences long-term return. Savings from lower utility bills matter too.

Strategic Tips for Homeowners in 2025

Plan early in the year – Book installation as soon as possible. Permitting and utility delays tend to increase late in the year.
Verify eligibility with your quote – Ask your solar contractor to provide a cost breakdown showing eligible expenses, installation date, and confirm placed-in-service timing.
Combine with other incentives – Check state tax credits, local rebates, low-interest financing, property tax exemptions, and net-metering benefits.
Consider battery storage – If you plan to include energy storage, integrate it now while eligibility is clear and guidelines are understood.
Retain documentation – Keep receipts, invoices, installer records, interconnection approval, proof of commissioning—all important for claiming the credit and future tax records.
Evaluate your tax situation – If you have low tax liability in the year you claim, strategise how to use the carry-forward.
Check roof condition and warranty – Ensure your roof is in good shape before solar installation to avoid non-eligible costs.
Shop reputable installers – Confirm licences, track record, financing terms, warranties, performance guarantees and timeline.
Monitor legislative updates – Tax law can change; stay abreast of updates during 2025.
Run ROI calculations – Use your utility bills, expected production, local rates, incentives to calculate payback period and lifetime savings. The tax credit reduces upfront cost significantly.

Conclusion

For homeowners looking to install solar energy systems, 2025 represents a decisive year. The federal solar tax credit under Section 25D offers a generous 30% reduction in eligible system costs—but eligibility is contingent on your system being placed in service by December 31, 2025. Delay even slightly and you risk missing out or facing reduced savings.

Acting now—securing a qualified installer, confirming timing, understanding incentives, and aligning your tax situation—can unlock substantial savings, shorten your payback period, and pave the way for long-term energy cost reduction and environmental benefit.

While tax credits alone shouldn’t be the sole reason to go solar, they significantly improve the financial case. Combine this with rising utility rates, improving solar technology, and state or local incentives, and installing in 2025 may be among the most cost-effective moments in recent years.

If you’re ready to evaluate offers, compare quotes, or calculate precise savings for your home, you’re in a strong position—just don’t wait too late. The deadlines and eligibility rules are firm, and once the calendar flips to 2026, the opportunity may vanish.