What’s the difference between a solar tax credit and a rebate?

If you’re thinking about installing a solar panel system this year or you’ve already done so, it’s important to understand the differences between a tax credit and a rebate, and how and when you’ll receive them. While everyone in the U.S. can claim the federal solar tax credit (ITC) no matter where you live, rebates are usually tied to your location and vary state-by-state. The ITC allows you to claim 30% of the total cost of your solar panel installation on your taxes, which results in thousands of dollars in savings. Rebates, on the other hand, tend to differ by region and the type of clean energy product you’re purchasing.

A tax credit is a dollar-for-dollar reduction of your tax bill that you can claim when filing your annual taxes. The solar tax credit is nonrefundable, so you won't receive a separate check for that 30% savings, but it will lessen what you owe in taxes, which means you ultimately get a bigger tax refund. For example, if you owe $9,000 in taxes for 2023, and you can claim a $6,000 federal solar tax credit for installing solar panels, you’ll then only owe $3,000 to Uncle Sam, greatly reducing what you owe for that tax year.  

“The solar ITC should be filed with the tax return for the year in which the system was installed,” said Gary Massey, a certified public accountant and founder of Massey and Company, a CPA firm. “There may be local incentives as well, but you need to check with the state or city you live in.”

If you don’t have a tax bill for 2023, don’t worry – you can carry forward the credit to 2024 and apply it then if you have tax liability that year. Even if you don’t have a tax bill in 2024, you’re still in luck – you can roll over your credit for as many years as you need to in order to claim the full amount, up until 2034, when the ITC is set to expire. That gives you a full decade to take advantage of your federal solar tax credit. 

“Unused credits can be carried forward, but you want to make sure to file a return for the year of installation,” said Massey. So even if you don’t have a tax bill in 2023, you still need to file for your installation in 2023 if that's the year your system was installed and turned on. 

Neither a credit or rebate have income limits, so no matter what your salary is you’re eligible for these benefits – and you can often receive both depending on the local and state rebates available to you. Typically, you’ll receive a rebate faster than a tax credit because you only receive your credit after filing your taxes.

You may be familiar with the concept of rebates from shopping in your daily life, where you’ll be offered cash back or an incentive from a manufacturer of a product when you purchase it. When it comes to renewable energy, you can also receive rebates directly from your state or the city you live in.

One benefit of a rebate compared to a tax credit is that some efficient energy rebates are up-front rebates, which means that you get your cash back right away. You don’t have to wait until filing your taxes to reap the financial gains of a rebate like you do with a tax credit. Even if a rebate isn’t up-front, you’ll typically receive it within a few months. 

There are also added benefits for low-income taxpayers who apply for rebates, as certain clean energy rebates will offer greater savings if your income qualifies you. As part of the IRA, the U.S. is releasing more than $8 billion in federal funding for additional home energy rebates to be rolled out this year, too.

Not only can you receive rebates from the government, but more potential savings comes in the form of rebates from manufacturers and installers as well. In many cases, the companies you’re dealing with when you invest in renewable energy will also provide financial incentives to encourage you to choose their products.  

While there is no limit to the amount you can claim for installing solar panels, there are caps to the amounts you can claim for other clean energy improvements you make to your home. For example, credits for heat pumps are capped at $2,000, and other popular products such as energy efficient air conditioners, exterior doors and breaker box or circuit upgrades are limited to $1,200.  

However, a major benefit to clean energy credits, which were extended by the Inflation Reduction Act in 2022, is that you can claim multiple different tax credits at once. If you install more than one renewable energy product on your property in a given year – say a heat pump and solar panels – you can claim both when it’s time to file your taxes.

For example, you can claim the $2,000 heat pump credit as well as the 30% ITC for your solar panels –  in addition to your state’s specific rebates for those home improvements – which means you could save as much as five figures on your tax bill. What’s more, you can claim these clean energy tax credits multiple years in a row. For instance, if you install a heat pump in 2023 and then install another one in 2024, you'll qualify for the $2,000 credit again in 2024.

Overall, the value of tax credits combined with rebates makes it hard to ignore the financial advantages of investing in renewable energy for your home. The savings don’t stop once you transition your home into an energy efficient property – that’s when the real benefits begin. Once you’ve installed your solar panels or heat pump and claimed your tax credits, you’re on your way to saving thousands of dollars on your electric bill for the next 30 years.

Take a look at your options for going solar on the EnergySage Marketplace and get an idea of how much you can save by investing in renewable energy for your home. By receiving multiple quotes from trusted installers that you can compare side-by-side, you'll be able to choose the best option for your personal finance situation. You can also speak with one of our Energy Advisors for free who can answer any questions you have about applying for the federal solar tax credit and help you understand what other rebates are available to you.