The Residential Clean Energy Credit offers a 30% tax credit for installing solar panels, battery storage, geothermal heat pumps, and other qualified clean energy systems. For a typical solar installation costing $25,000, that’s $7,500 back in your pocket. For a whole-home system with solar and battery storage totaling $40,000, you could claim $12,000 against your federal tax liability.
But there’s a critical deadline you need to know about. The One Big Beautiful Bill Act, signed into law on July 4, 2025, terminated this credit effective December 31, 2025. Any clean energy property installed after that date – even if you signed contracts or started planning in 2025 – will not qualify for the 30% credit.
I’ve spent more than 15 years helping clients navigate complex tax credits and IRS compliance issues. I’ve seen taxpayers leave thousands of dollars on the table because they missed critical deadlines or didn’t understand eligibility requirements. With the Residential Clean Energy Credit, the stakes are particularly high because there’s no dollar limit on what you can claim
That $30,000 solar system? You can claim all $9,000. That $50,000 comprehensive renewable energy upgrade? The full $15,000 credit is available – if your system is installed and operational by December 31, 2025.
This credit was originally set to remain at 30% through 2032 before gradually phasing down. The One Big Beautiful Bill Act changed that timeline drastically. You now have less than 12 months to complete installation if you want to capture this substantial tax benefit.
If you’re considering solar panels, battery backup systems, geothermal heating, or wind energy for your home, understanding exactly how this credit works – and what you need to do before year-end – is essential.
What Is the Residential Clean Energy Credit
The Residential Clean Energy Credit (also called the Section 25D credit or the solar tax credit) provides a federal income tax credit equal to 30% of the cost of qualified clean energy property installed in your home.
This isn’t a deduction that reduces your taxable income. It’s a credit that directly reduces the amount of tax you owe dollar-for-dollar. If you owe $15,000 in federal taxes and you claim a $10,000 Residential Clean Energy Credit, your tax bill drops to $5,000.
The credit has no annual or lifetime dollar cap. Unlike the Energy Efficient Home Improvement Credit (which maxes out at $3,200 annually), you can claim 30% of your entire qualifying expenditure regardless of the amount.
This makes it particularly valuable for high-cost installations like comprehensive solar systems, geothermal heat pumps, or combined solar-plus-storage solutions.
What Property Qualifies for the Credit
Six categories of clean energy property qualify for the 30% credit. Each has specific requirements you must meet.
Solar Electric Property (Solar Panels)
Qualified solar electric property includes equipment that uses solar energy to generate electricity for use in your home. This covers:
- Solar panels (photovoltaic cells) – The panels themselves that convert sunlight to electricity
- Inverters – Equipment that converts DC power from panels to AC power your home uses
- Mounting hardware and racking systems – Physical infrastructure to install panels
- Wiring and electrical components – Connecting the system to your home’s electrical system
- Labor costs for installation – Professional installation expenses qualify
Special consideration for solar roofing: Traditional roofing materials don’t qualify because they serve primarily a structural function. However, solar roofing tiles and solar shingles that generate electricity while also performing roofing functions qualify for the credit.
Solar Water Heating Property
Solar water heaters use solar energy to heat water for use in your home. To qualify, the equipment must be certified by the Solar Rating & Certification Corporation or a comparable entity endorsed by your state government.
The system can heat water for domestic use, pools, or hot tubs. Labor and installation costs qualify.
Small Wind Energy Property
Small wind turbines that generate electricity for residential use qualify. The system must be installed at your residence and used to generate electricity primarily for use at that residence.
There’s no specific capacity requirement, but practical considerations limit residential wind to turbines with capacity under 100 kilowatts.
Geothermal Heat Pump Property
Geothermal heat pumps use the stable temperature of the earth to provide heating and cooling for your home. To qualify, the system must meet Energy Star requirements in effect at the time of purchase.
These systems are substantially more expensive than traditional HVAC but dramatically more efficient. The 30% credit makes them economically competitive with conventional systems.
Fuel Cell Property
Fuel cells generate electricity through chemical reactions. To qualify, the property must have a rated capacity of at least 0.5 kilowatts.
Important limitation: Fuel cell property is limited to $500 for each half kilowatt of capacity. If multiple people live in the home, the combined credit for all residents can’t exceed $1,667 for each half kilowatt of capacity.
This is the only category of qualified property that has a dollar limit on the credit amount.
Battery Storage Technology
This category was added by the Inflation Reduction Act in 2022. Battery storage systems that can store at least 3 kilowatt-hours of capacity qualify for the credit.
The battery doesn’t have to be charged exclusively by solar panels. Any battery meeting the capacity requirement qualifies – whether charged by solar, wind, grid power, or any combination.
This expands the credit substantially. You can install battery backup for your home without installing solar panels and still claim the 30% credit, provided the battery has at least 3 kWh capacity.
December 31, 2025: The Critical Deadline
Originally, the Residential Clean Energy Credit was set to remain at 30% through 2032, then phase down to 26% in 2033, 22% in 2034, and expire after 2034.
The One Big Beautiful Bill Act terminated this timeline. The credit now expires completely for any expenditures made after December 31, 2025.
This means your qualified clean energy property must be installed and placed in service by December 31, 2025. Signing a contract in 2025, making a deposit in 2025, or starting installation in 2025 doesn’t qualify if the system isn’t operational by year-end.
The IRS is clear on this point: you claim the credit for the tax year when the property is installed, not when it’s purchased or when you sign contracts.
For most homeowners, the realistic deadline is earlier than December 31. Solar installations typically take 2-4 months from contract signing to final activation. Geothermal heat pump installations often take 3-6 months. If you’re considering these systems, you need to start the process soon – possibly by summer 2025 – to ensure completion by year-end.
How Much Can You Actually Claim
The credit equals 30% of your total qualified expenditures. This includes:
- Equipment costs (panels, inverters, batteries, pumps, turbines)
- Installation labor
- Permitting fees
- Inspection costs
- Development costs directly related to the installation
- Assembly costs
- Original installation of the system
What you cannot include:
- Interest on loans (including loan origination fees)
- Extended warranties purchased separately
- Maintenance agreements
- Property value increases
Real-world examples:
Solar panel system costing $30,000 – Credit: $9,000
Geothermal heat pump system costing $45,000 – Credit: $13,500
Solar panels ($28,000) + battery storage ($12,000) = $40,000 total – Credit: $12,000
Small wind turbine system costing $20,000 – Credit: $6,000
There is no cap on the total credit amount (except for fuel cells, which are limited to $500 per half kilowatt of capacity). You can claim 30% of the entire cost regardless of how expensive the system is.
Which Homes Qualify
The Residential Clean Energy Credit applies to your main home and, in most cases, your second home. Understanding which properties qualify prevents you from claiming credits you’re not entitled to.
Main Home
Your main home is where you live most of the time. This can be:
- A house
- Condominium
- Cooperative apartment
- Mobile home
- Houseboat
- Manufactured home that conforms to Federal Manufactured Home Construction and Safety Standards
You can own or rent your main home. Renters who install qualified property (with landlord permission) can claim the credit just like homeowners.
The home must be located in the United States. Property installed at foreign residences doesn’t qualify, even if you’re a U.S. taxpayer.
Second Home
You may claim the credit for qualified property installed at a second home in the United States if:
- You use the home as a residence part-time
- You don’t rent the home to others
- The home is located in the United States
Important exception for fuel cells: You cannot claim the credit for fuel cell property installed at a second home. Fuel cell credits only apply to your main home.
Rental Property and Investment Property
You cannot claim the Residential Clean Energy Credit for property you don’t use as a residence. If you’re a landlord installing solar panels on a rental property where you don’t live, the residential credit doesn’t apply.
Different tax credits exist for commercial and business property, but the Residential Clean Energy Credit specifically requires the home be used as your residence.
The Credit Is Nonrefundable (But You Can Carry It Forward)
Understanding the nonrefundable nature of this credit is critical for tax planning.
A nonrefundable credit can reduce your tax liability to zero, but it can’t create a refund beyond what you’ve paid in. If you owe $8,000 in federal taxes and you have a $12,000 credit, you can only use $8,000 of the credit to eliminate your tax liability. The credit won’t generate a $4,000 refund check.
However, you can carry forward the unused portion. That $4,000 unused credit carries forward to future tax years where it can offset future tax liability.
There’s no expiration on how long you can carry the credit forward. The unused portion continues reducing your future tax liability until it’s fully utilized.
Tax planning consideration: If you’re installing expensive systems that will generate large credits, consider your tax liability in the installation year and future years. High-income earners with substantial tax liability can use large credits immediately. Retirees or lower-income taxpayers might need multiple years to fully realize the credit benefit.
How to Claim the Residential Clean Energy Credit
Claiming the credit requires filing IRS Form 5695, Residential Energy Credits, with your federal tax return.
Step-by-Step Process
Step 1: Obtain documentation. Collect all receipts, invoices, and manufacturer certifications showing:
- Total cost of equipment and installation
- Date the system was placed in service
- Certification that equipment meets Energy Star or Solar Rating requirements
- Property address where equipment was installed
Step 2: Complete Form 5695, Part I. This section calculates your Residential Clean Energy Credit. You’ll enter:
- Costs for each category of qualified property
- Any credit carryforward from prior years
- Total credit available
Step 3: Calculate your credit limitation. The Residential Clean Energy Credit Limit Worksheet (in Form 5695 instructions) determines how much credit you can use based on your tax liability.
Step 4: Determine credit carryforward. If your credit exceeds your tax liability, calculate the carryforward amount for future years.
Step 5: Attach Form 5695 to your Form 1040. Include Form 5695 when you file your federal return. Enter the credit amount on the appropriate line of Schedule 3 (Form 1040).
Step 6: Reduce your home’s basis. Important for future tax planning – you must reduce the cost basis of your home by the amount of credit allowed. This affects capital gains calculations if you sell the home later.
Record Retention
Keep all documentation related to your clean energy installation for at least seven years. The IRS can request verification that property qualified for the credit, that costs were accurately reported, and that the system was placed in service when claimed.
Manufacturer certifications are particularly important. If the IRS questions whether your solar water heater met certification requirements or your geothermal heat pump met Energy Star standards, you’ll need documentation proving compliance.
Common Mistakes That Disqualify the Credit
Understanding what doesn’t qualify prevents expensive errors.
Installing Property After December 31, 2025
This is now the single biggest risk. If your system isn’t fully installed and operational by year-end 2025, you lose the 30% credit entirely. There’s no partial credit for work completed or deposits paid.
Including Ineligible Costs
The most common mistakes include:
- Including loan interest or financing charges
- Claiming traditional roofing materials as part of solar installation
- Including maintenance contracts or extended warranties
- Claiming HOA fees or special assessments for shared equipment
Claiming Credit for Rental Property
Landlords frequently believe they can claim residential credits for equipment installed at rental properties. Unless you live in the property as your residence, the Residential Clean Energy Credit doesn’t apply.
Using Less Than 80% for Residential Purposes
If you use the property for business purposes, only the portion allocable to residential use qualifies. If your home office occupies 20% of your home and you install solar panels, only 80% of the cost qualifies for the Residential Clean Energy Credit. The remaining 20% might qualify for business energy credits under different rules.
Not Meeting Energy Efficiency Requirements
Each category of property has specific requirements:
- Solar water heaters must be certified by Solar Rating & Certification Corporation or state-endorsed entity
- Geothermal heat pumps must meet Energy Star requirements
- Battery storage must have at least 3 kWh capacity
- Fuel cells must have at least 0.5 kW rated capacity
Installing equipment that doesn’t meet these specifications disqualifies your credit.
Residential Clean Energy Credit vs. Energy Efficient Home Improvement Credit
Two separate federal tax credits exist for home energy improvements. Understanding which applies to your situation is essential.
Residential Clean Energy Credit (Section 25D)
- Eligible property: Solar, wind, geothermal, fuel cells, battery storage
- Credit amount: 30% of total cost
- Annual limit: None (except fuel cells)
- Deadline: Property placed in service by December 31, 2025
- Carryforward: Yes, unused credit carries forward indefinitely
Energy Efficient Home Improvement Credit (Section 25C)
- Eligible property: Insulation, windows, doors, HVAC, heat pumps, water heaters
- Credit amount: 30% of cost with specific caps
- Annual limit: $1,200 for most improvements, $2,000 for heat pumps
- Deadline: Also expires December 31, 2025
- Carryforward: No, unused credit cannot carry forward
You can claim both credits in the same year if you make qualifying improvements under each program. For example, installing solar panels (Residential Clean Energy Credit) and replacing windows (Energy Efficient Home Improvement Credit) in the same year allows you to claim both credits.
State and Local Incentives
Federal tax credits aren’t the only incentives available. Many states, utilities, and local governments offer additional benefits for clean energy installations.
State tax credits vary widely. Some states offer credits mirroring the federal program. Others provide different incentive structures including grants, rebates, or sales tax exemptions.
Utility rebates can reduce your upfront costs substantially. Many utilities offer cash rebates for installing solar, battery storage, or other renewable energy systems. These rebates don’t reduce your federal tax credit – you can claim the full 30% even if a utility rebate covered part of the cost.
Property tax exemptions exist in many jurisdictions. Some states exempt the added value of solar installations from property tax assessments, preventing your property taxes from increasing when you add valuable clean energy systems.
Check your state energy office, utility websites, and local government programs to identify all available incentives. Combining federal credits with state and local programs can reduce your net cost by 40-50% or more.
What Happens If You Sell Your Home
If you sell your home after installing qualified property but before fully using the credit, you generally lose the unused portion. The credit doesn’t transfer to the new owner.
However, there’s an important exception. If you move before the end of the tax year and install the same type of qualified property at your new home in the same year, you can claim credits for both installations on that year’s tax return.
The credit you claimed reduces your home’s cost basis for capital gains purposes. If you claimed a $10,000 credit and your home’s original cost basis was $300,000, the adjusted basis becomes $290,000. This affects capital gains calculations when you sell.
Get Professional Guidance for Maximum Tax Benefits
The Residential Clean Energy Credit offers substantial tax savings, but the rules are complex and the December 31, 2025 deadline creates urgency.
If you’re considering clean energy improvements, understanding exactly what qualifies, how much you can claim, and how to structure your installation to maximize tax benefits requires expertise in both clean energy technology and federal tax law.
I’ve spent more than 15 years helping clients navigate complex tax credits, IRS compliance issues, and tax controversies. I’ve seen taxpayers lose tens of thousands of dollars in available credits because they didn’t understand eligibility requirements or missed critical deadlines.
With the Residential Clean Energy Credit now expiring December 31, 2025, the window for capturing this benefit is closing rapidly. If you’re considering solar, battery storage, geothermal, or wind energy installations, you need to start the process soon to ensure completion by year-end.
At Silver Tax Group, I provide comprehensive tax planning guidance for homeowners making significant financial decisions. Whether you’re evaluating the tax implications of clean energy installations, optimizing your overall tax strategy, or resolving IRS compliance issues, I offer the legal expertise you need.
Contact Silver Tax Group today for a consultation on maximizing your clean energy tax benefits. We’ll review your specific situation, explain exactly what qualifies under current law, help you structure your installation for maximum tax benefits, and ensure you meet all IRS requirements for claiming the credit.
The December 31, 2025 deadline means you need to act now. Don’t leave thousands of dollars in tax credits on the table because you missed the deadline or didn’t understand the rules.
Call us or visit our website to schedule your consultation. Because when a 30% tax credit with no dollar limit is about to expire, you need expert guidance to capture every available tax benefit before it’s too late.
