What Are the Tax Benefits of Solar Panels?

When you install solar panels on your home, you start saving money on your electricity bill almost right away. In Colorado’s sunny climate, solar panels are an especially attractive investment. With over 300 days of sunshine annually, Denver residents are uniquely positioned to maximize their solar energy production and tax benefits.

But the savings don’t stop there. The federal solar tax credit expired on December 31, 2025, but Colorado homeowners still benefit from state sales tax exemptions, property tax exemptions, utility rebates, and a state credit for battery storage paired with solar.

Homeowners can benefit from the residential clean energy credit, which varies depending on installation costs and rates. This credit covers various energy improvements and renewable projects available to homeowners under this tax incentive.

So how do you claim the federal solar tax credit for your clean energy? And what does it cover? Let’s dive in.

Understanding Tax Credits

A tax credit is a powerful tool that directly reduces the amount of tax you owe to the government. Unlike tax deductions, which lower your taxable income, tax credits provide a dollar-for-dollar reduction in your tax liability. This means that if you qualify for a $1,000 tax credit, your tax bill is reduced by $1,000. Tax credits are designed to encourage certain behaviors and investments, such as adopting renewable energy solutions like solar panels, by offering financial incentives.

How Tax Credits Work

Tax credits work by directly lowering the amount of tax you owe. For instance, if your tax bill is $2,000 and you have a $500 tax credit, your bill drops to $1,500. There are two main types of tax credits: refundable and non-refundable. Refundable tax credits can reduce your tax liability below zero, resulting in a refund. Non-refundable tax credits, on the other hand, can only reduce your tax liability to zero, meaning you won’t owe any taxes, but you won’t get a refund either. Understanding how these credits apply can help you maximize your savings, especially when investing in a solar energy system.

Benefits of Tax Credits

Tax credits offer numerous benefits, making them a valuable financial tool. They can significantly reduce the amount of tax you owe, increasing your disposable income. This extra cash can be used for other investments or savings. Tax credits also serve as incentives for making eco-friendly choices, such as installing solar panels or purchasing energy-efficient appliances. By encouraging these behaviors, tax credits help promote sustainable practices and stimulate economic growth, benefiting both individuals and the broader community.

How Does the Federal Solar Tax Credit Work?

First and foremost, you should know that the federal solar tax credit is known more formally as the Investment Tax Credit (ITC). It’s part of a congressional effort to encourage more widespread adoption of solar panels throughout the United States – and it has been very effective in doing just that.

According to the Solar Energy Industries Association, the solar power industry in the United States has grown by 10,000% since the ITC went into effect. This has led not only to a greater adoption of residential and commercial solar nationwide, but also to billions of dollars for the U.S. economy.

The ITC was originally enacted in 2006. Until 2019, homeowners received a 30% tax credit for installing solar panels. The tax credit dropped to 26% for systems installed in 2020 and 2021.

The Inflation Reduction Act of 2022 restored the credit to 30% and extended it through 2034. However, the One Big Beautiful Bill Act, signed in 2025, terminated the residential clean energy credit early. The 30% federal solar tax credit ended December 31, 2025.

To qualify for the credit when it was active, the system had to meet these requirements:

• Own the system outright (it cannot be leased)
• Install new, never-used-before solar panels and other equipment (used systems and components do not qualify for the ITC)
• Have the solar panels installed on your primary or secondary residence located in the United States
  OR
• Install the solar panels at an off-site community solar project in which you are participating

One of the most attractive features of the ITC is that it covers the “total cost of installation.” This can include:

• The solar equipment itself
• Solar consultant fees
• Installation fees
• Electrician fees
• Engineering fees
• Permitting expenses
• Wiring
• Tools, parts, and equipment (whether purchased or rented)
• Freight shipping costs
• Installation of solar battery storage

If your solar system was placed in service before December 31, 2025, you can still claim the credit on your 2025 tax return using IRS Form 5695. The credit had no maximum dollar amount and covered the total installation cost.

Solar panel systems are far less expensive than they were even a few years ago, both in terms of the equipment itself and the installation costs. How much you spend will largely depend on how extensive a system you decide your home needs.

Before you start the installation, getting a home energy audit is important to assess your home’s efficiency and identify opportunities for energy savings. This is key to designing an effective solar panel system, and the cost of the audit can be included in the tax credit calculation.

Tax Deductions vs. Tax Credits

It’s important to understand that the ITC is a tax credit, not a tax deduction. What’s the difference? We aren’t accountants or attorneys, but we’ll take a quick stab at the distinction:

• A tax deduction generally refers to a portion of your income that is exempt from income tax (usually because you had to spend that income on a business expense or because another deduction allowance, such as the standard deduction, covered it).
• A tax credit, meanwhile, is a dollar-for-dollar reduction of the total amount of income tax you have to pay.

Homeowners can claim multiple tax credits based on the number of solar systems installed on different properties, significantly increasing their total tax savings.

For Denver homeowners, the combination of abundant sunshine and rising energy costs makes solar a strong long-term investment. A typical 6kW solar installation in Denver runs around $18,000 before incentives. Colorado’s sales tax exemption, property tax exemption, and local programs like the Denver CARe rebate meaningfully reduce the out-of-pocket cost for Front Range residents.

Generally speaking, tax credits offer greater tax savings than tax deductions. Too many websites and blog articles discuss the ITC as a “tax deduction.” Don’t be misled. We’re talking about a federal tax credit here, and that’s a big deal.

Who Can Claim the Federal Tax Incentives for Solar Power?

The federal solar tax credit is available to residential solar adopters and commercial entities anywhere in the United States. Although most residential adopters are homeowners, you can also claim the ITC if you are a “tenant-stockholder at a cooperative housing corporation” or have membership in a condominium. Per the U.S. Office of Energy Efficiency & Renewable Energy, your tax credit will encompass “the amount you spend contributing to the cost of the solar PV system.”

Homeowners can claim the ITC if they install solar panels on a secondary residence (such as a vacation home). You will be unable to claim the federal solar tax credit, however, if the property is primarily a rental unit.

Solar water heaters are also eligible for federal tax credits, provided they meet the necessary certification requirements.

It is important to note that you are not eligible for the federal solar tax credit if the refund exceeds your tax liability for the year. However, “Homeowners may get a tax refund at the end of the year due to the tax credit, if the reduction in tax liability means there was overpayment during the year.

This can often occur when employers deduct taxes from employees ‘ pay for the year. However, the taxpayer’s total tax liability still limits such a refund. However, you can carry over any unused tax credit amount to the next tax year.”

Eligible Solar Energy Systems

Solar panels, also known as photovoltaic (PV) systems, are an excellent way to harness solar energy and reduce your electricity bills. These panels convert sunlight into electricity, providing a renewable energy source for your home. There are three main types of solar panels: monocrystalline, polycrystalline, and thin-film. Each type has its own advantages, but all can help you save on energy costs.

If your panels were placed in service before December 31, 2025, they qualified for the federal solar tax credit when installed on a property you owned and used as your primary or secondary residence. The system also had to be new and unused.

Even without the federal credit, choosing the right solar panels for your Colorado climate makes a meaningful long-term difference in energy bills, home value, and resilience.

What About State and Local Incentives?

Some states have also introduced tax credits, rebates, and other incentives to encourage solar adoption. Colorado does not offer a state tax credit for solar PV alone. However, the state offers a 10% tax credit when you add battery storage to a solar installation, plus sales tax and property tax exemptions on solar equipment.

However, this does not mean that our state lacks solar support. Public utilities throughout Colorado offer incentives for customers to switch to solar, including:

• Denver CARe Rebate – The Denver CARe Rebate is particularly beneficial for local homeowners, offering up to $2,000 for qualifying solar installations. Denver residents in specific neighborhoods, such as Montbello, Elyria-Swansea, and Globeville, may qualify for additional incentives through the city’s environmental justice initiatives.
• Net metering – Denver residents served by Xcel Energy can take advantage of particularly favorable net metering rates. Given Denver’s high altitude and clear skies, many homeowners find they can generate excess power during summer months, building up credits to offset their winter energy usage
• Xcel Energy Solar*Rewards – Xcel will pay you for your contribution to the power grid in exchange for renewable energy certificates
• Battery Connect – Denver CARe Rebate program offers a rebate of $2,750 when they connect a solar energy system with battery storage to the power grid.

Residential solar adopters are also exempt from sales tax on solar panels and other equipment involved in the installation of your energy system.

Contact REenergizeCO Today

As Denver continues to experience rapid growth and development, more homeowners are recognizing the value of solar installation. The city’s commitment to renewable energy, evidenced by initiatives like the Denver Climate Action Plan, makes now an ideal time for Denver residents to invest in solar.

Our team understands the unique challenges of installing solar in Denver’s climate, from accounting for snow accumulation to optimizing panel placement for our latitude.

• Experience: Our team has completed solar panel installations for hundreds of homes in Denver, Fort Collins, and throughout the Front Range.
• Technology: We install durable and long-lasting solar panels that can power your home for decades.
• Home Energy Audit: We start each solar upgrade project with a home energy audit to assess your home’s energy efficiency and identify the changes needed. This enables us to design a solar energy system specifically for your home.
• Transparent Pricing: Your budget is important to us. When you hire REenergizeCO, we will always be upfront about how much your switch to solar will cost.
• Assistance with Savings: REenergizeCO doesn’t stop working there once your solar energy is installed. Our team will help you apply for rebates and other incentives.

Get in touch with REenergizeCO today to schedule your initial consultation!