Homeowners considering solar panels may be aware of a critical deadline, but they should carefully consider all the factors before rushing into a major home renovation project. With only months remaining before the federal tax credit expires, the solar industry is experiencing an unprecedented rush that raises important questions about quality and service.
Tax credits available for individual taxpayers who have solar panels installed on their primary residences have received a big uptick in attention in recent months, mostly due to the early sunset of the credits effective December 31, 2025.
Under prior law, the credits were to phase out beginning in 2033, ending completely in 2034.
However, HR1, also known as the One Big Beautiful Bill Act or OBBBA, signed by President Trump on July 4, 2025, ends the credits early. There is a 30% federal tax credit available, but only for panels installed on or before December 31, 2025.
This has caused an understandable rush in the residential solar market. Under pressure from both homeowners anxious to take advantage of the tax credits as well as uncertainty in the renewable energy market headed into the second half of President Trump's term, solar salespeople are promoting the benefits of sun-powered energy left and right.
The problem? The tax implications of solar installations are complex and require specialized knowledge to navigate properly.
The Residential Clean Energy Credit, as the solar tax credit is officially called, is a nonrefundable federal tax credit for 30% of the cost of solar panels, solar water heaters, battery storage, and other equipment, installed on a primary or secondary residence.
The important terminology here is "nonrefundable". This means that the credit itself cannot create a tax refund where there otherwise wouldn't be one. Let's look at an example.
Say a married couple is considering solar for their home. They each work and their aggregate wages are about $125,000. Their tax liability (the gross amount of federal income taxes they owe before deducting any credits or withholding from their paychecks) is $10,743.
They have three children at home under the age of 17, so they are eligible for $6,600 in child tax credits. This brings their net tax liability to $4,143.
Say on that $125,000 they had $4,400 of federal withholding on their paychecks. Under normal circumstances, they'd be due a refund of $257 ($10,743 gross tax liability, minus $6,600 child tax credits, minus $4,400 federal tax withholding).
Now say they're considering installing a $30,000 solar panel system on their home. The total potential credit on this system would be $9,000 ($30,000 x 30%). This does not mean they will now get a refund of $9,257 ($9,000 credit plus $257 original refund).
Instead, they'd get a refund of $4,400, the total of their federal tax withholding, and the rest of the credit would be carried forward to be used in a future year.
Here's how that math works: Their net federal tax liability after child tax credits would still be $4,143. This is the maximum solar tax credit they can use this year.
The solar tax credit would bring their federal tax liability to $0, and they would get a refund of all $4,400 they had withheld from their paychecks, but no more.
The rest of the credit, or $4,857, ($9,000 total credit minus $4,143 used) would carry forward indefinitely, and would follow the same math until it was used up. This is the case even though the credit itself expires on December 31, 2025.
Now let's say that couple makes $250,000 in wages. Now their gross tax liability is $35,134. After their child tax credits are applied, they have a net tax liability of $28,534.
Let's say they had $32,000 of federal tax withholding from their paychecks. Without the solar panel project, they'd be due a refund of $3,466 ($32,000 in withholding minus $28,534 in tax liability).
With the solar panel project, they would be due a refund of $12,466, which is their original refund of $3,466 plus their solar credit of $9,000.
This is because their net tax liability after other nonrefundable credits such as the child tax credit was enough to absorb the full solar credit. That is, $28,534 is more than $9,000.
As you can probably guess, the details matter. Every individual situation is different, and not just your individual current situation, but also your projected future income and other life circumstances can impact the tax considerations for this decision.
Note that the system must be fully installed and operational by December 31, 2025 - simply signing a contract or making a deposit isn't enough. Keep all receipts and installation documentation - you'll need Form 5695 when filing your taxes.
Given the rush to get these projects completed before this year's deadline, it's more important than ever to vet your contractors thoroughly. Given the increased volume of projects before year-end, homeowners should take extra care in selecting contractors for what is typically a $20,000-$50,000 investment in their home.
Solar professionals and tax professionals each bring essential expertise to these decisions. While solar experts can explain technology, efficiency, and installation processes, tax professionals can ensure homeowners fully understand the financial implications and maximize their benefits.
There are fewer than four months left for this particular round of solar tax credits, but it's probable that clean energy credits will be back in some form or another in the future. The tax savings are not the only consideration; this is a major construction project and the potential impacts to your home and its value should be one of many factors to think about when considering these projects.
Given the complexity of these calculations and the significant financial stakes, consulting with a tax professional before committing to solar is essential.
