On your federal tax return, solar panel costs go on Form 5695, Part I (Residential Clean Energy Credit), where you calculate a 30% credit on your qualified expenses. The credit then moves to Schedule 3, line 5a, and from there to Form 1040, line 20, reducing the tax you owe. This path applies for the 2025 tax year if your system was placed in service by December 31, 2025; the credit ended for installations completed after that date, though unused amounts from earlier years still carry forward.1Internal Revenue Service. FAQs for Modification of Sections 25C, 25D, 25E, 30C, 30D, 45L, 45W, and 179D Under the One Big Beautiful Bill
Filling Out Form 5695, Part I
Form 5695 is titled Residential Energy Credits, and solar goes in Part I.2Internal Revenue Service. Form 5695 – Residential Energy Credits
Line 1 is where your solar electric property costs go. Enter the total you paid for panels and their installation, after subtracting any utility subsidies or manufacturer rebates that reduce your qualified expenses (more on that below). Battery storage of at least 3 kilowatt-hours and solar water heating have their own lines in Part I if your project included them.
Line 6a adds up all the clean energy costs from the lines above. Line 6b multiplies that total by 30% to produce your preliminary credit. So $28,000 in qualified costs yields a preliminary credit of $8,400.
Line 12 is for carryforward from a prior year. If you claimed the credit before and couldn’t use all of it, pull the amount from line 16 of last year’s Form 5695 and put it here. Line 13 combines the current-year credit with the carryforward.
Lines 14 and 15 apply the tax liability limit. The credit is nonrefundable, so it can only take your federal income tax down to zero. Line 14 uses a worksheet in the Form 5695 instructions to figure your limit, and line 15 is the smaller of your total available credit (line 13) or that limit.3Internal Revenue Service. Instructions for Form 5695 – Residential Energy Credits Line 15 is the number you actually claim this year.
Moving the Credit to Schedule 3 and Form 1040
The amount from line 15 of Form 5695 goes on Schedule 3, line 5a, which is labeled for the residential clean energy credit.4Internal Revenue Service. Schedule 3 (Form 1040) Schedule 3 gathers nonrefundable credits that don’t have their own line on Form 1040.
Schedule 3 totals its Part I credits on line 8, and that total transfers to Form 1040, line 20. Line 20 reduces the tax figured earlier on your 1040.
Tax software handles these transfers automatically once you complete the Form 5695 entries. If you file on paper, trace the number through by hand: Form 5695 line 15 → Schedule 3 line 5a → Form 1040 line 20.
Which Costs Belong on Line 1
Qualified costs include the solar panels and the labor for onsite preparation, assembly, installation, and any wiring or piping to tie the system into the home. Permit fees, inspection costs, and sales tax on the equipment are generally includable. Battery storage of at least 3 kilowatt-hours counts.5Internal Revenue Service. Residential Clean Energy Credit
Roofing is the common trap. Traditional shingles, trusses, and structural components that simply hold up the panels do not qualify, even when the installer replaces them as part of the job. Solar roofing tiles and solar shingles do qualify because they generate electricity themselves. If your installer’s invoice bundles structural work with the solar equipment, ask for an itemized breakdown before you calculate line 1.
Eligibility is also tied to the home. It has to be in the United States and used as your residence. Your main home qualifies, and a second home you live in part-time qualifies, but a property you rent out to others does not.
Rebates and Subsidies That Reduce Your Costs
Subsidies from your electric utility for buying or installing the system have to be subtracted from your costs before you calculate the credit. The same rule applies to rebates from the manufacturer, distributor, or installer that are tied to the price of the property.5Internal Revenue Service. Residential Clean Energy Credit
State incentives usually work differently. Most state programs called “rebates” don’t meet the federal definition of a purchase-price adjustment, so they generally don’t reduce your qualified expenses. Net metering credits, where the utility pays you for excess electricity your panels feed to the grid, also don’t reduce your qualified costs.
Leased Systems and PPAs
If you lease your solar panels or buy the electricity through a power purchase agreement, none of this reporting applies to you. The solar company owns the equipment, so you have no qualified expenditure and nothing to put on Form 5695. Any federal tax benefit sits with the company that owns the system.
Carrying Forward Unused Credit
If your credit is bigger than your tax bill, the leftover isn’t lost. Line 16 of Form 5695 is the carryforward: line 13 minus line 15. That figure goes on line 12 of next year’s Form 5695.
Carryforwards don’t expire. Even though the credit ended for new installations after 2025, an unused balance from a qualifying installation keeps rolling forward until you’ve used it all.6Office of the Law Revision Counsel. 26 USC 25D – Residential Clean Energy Credit A $9,000 credit against a $4,000 tax bill leaves $5,000 to carry into next year, and so on until the balance is gone.
The carryforward belongs to you, not to the house. If you sell the home before you’ve used it up, you keep the remaining credit and apply it to your future returns. The buyer does not inherit it.
What to Keep After You File
You don’t attach receipts to the return, but you need them if the IRS reviews it. Save itemized invoices that separate equipment, installation labor, and any structural work. Keep paperwork on any utility rebate or manufacturer discount, since those change the line 1 figure. The manufacturer’s certification statement confirming the equipment meets federal standards is also worth holding.
Keep these records for at least three years after you file the return that claims the credit. If you’re carrying credit forward across several years, hold the documentation until three years past the final return that uses the last of it.