The Federal Solar Tax Credit in 2026: What Actually Changed
HR1 repealed the residential solar tax credit. Here's what happened, what's still available, and how to adjust your solar plans.
TL;DR
The residential solar tax credit (Section 25D) was repealed by HR1 in 2025. If you installed solar before the cutoff, you can still claim the credit. If you haven’t installed yet, the 30% federal discount is gone. Commercial solar credits (Section 48/48E) survive with modifications and a phasedown schedule. State incentives and other strategies can partially offset the loss, but the math for residential solar changed.
Key Numbers
- Residential tax credit (Section 25D): Repealed. 0% for new installations in 2026.
- Previous credit: 30% of total system cost, no cap
- Value lost on average system: ~$9,150 (30% of $30,500)
- Commercial credit (Section 48): Still available, phasing down from 30% starting 2027
- Safe harbor deadline for commercial: Projects must begin construction by July 2026
What Happened
The Inflation Reduction Act of 2022 (IRA) extended the residential clean energy credit at 30% through 2032, then set it to step down to 26% in 2033 and 22% in 2034. That timeline is gone.
HR1 (the budget reconciliation bill passed in late 2025) repealed Section 25D of the tax code. This is the provision that allowed homeowners to claim 30% of their solar installation cost as a dollar-for-dollar federal tax credit.
The repeal applies to systems where installation begins after the effective date specified in the legislation. If your system was installed (or substantially begun) before that date, you can still claim the credit on your 2025 or 2026 tax return.
What the Credit Used to Cover
For context on what was lost, Section 25D covered 30% of:
- Solar panels and inverters
- Racking and mounting hardware
- Installation labor
- Permitting and inspection fees
- Battery storage (if installed with or added to solar)
- Sales tax on the system (in states that charge it)
On the average $30,500 residential system, that was $9,150 back as a tax credit. Not a deduction (which reduces taxable income) but a credit (which reduces your actual tax bill dollar for dollar).
The credit was nonrefundable, meaning it could only offset taxes you owed. If your federal tax liability was $6,000 and your credit was $9,150, you could carry the remaining $3,150 forward to the next tax year. This rollover provision still applies for anyone claiming credits from pre-repeal installations.
Can You Still Claim It?
If your system was installed before the repeal effective date: Yes. File the credit using IRS Form 5695 with your tax return for the year installation was completed.
If your system was under contract but not yet installed: This depends on the safe harbor provisions in HR1. Generally, if you had a binding contract and paid at least 5% of the total cost before the cutoff, you may qualify under safe harbor rules. Consult a tax professional for your specific situation.
If you haven’t started yet: The residential credit is not available for new installations in 2026.
What’s Still Available: Federal Level
The repeal targeted residential credits specifically. Other parts of the federal solar incentive structure survived, though some with modifications:
Commercial Solar Credits (Section 48 / 48E)
Businesses, nonprofits (through direct pay), and commercial property owners can still access the investment tax credit. The base credit was preserved but faces a phasedown:
| Year Construction Begins | Credit Rate |
|---|---|
| Before July 2026 | 30% (with prevailing wage/apprenticeship requirements) |
| 2027 | 26% |
| 2028 | 22% |
| 2029+ | TBD (subject to further legislation) |
The safe harbor provision means commercial developers are rushing to begin construction before the July 2026 deadline. “Begin construction” means either starting physical work of a significant nature or paying 5%+ of total project cost (the “5% safe harbor”).
Accelerated Depreciation (MACRS)
For business-owned solar systems, the Modified Accelerated Cost Recovery System allows depreciating solar equipment over 5 years (though the actual useful life is 25-30 years). Bonus depreciation was 60% in 2025 and steps down to 40% in 2026. This doesn’t help homeowners directly, but it explains why solar leases and PPAs can still offer competitive rates: the leasing company captures the commercial tax benefits.
Domestic Content Bonus
The 10% domestic content adder for commercial projects (using US-manufactured panels, inverters, and steel) survived HR1. With US module manufacturing capacity exceeding 60 GW (per SEIA data), more projects can qualify for this bonus.
What’s Still Available: State Level
The loss of the federal credit makes state incentives more important than ever. Here are the most valuable programs still active:
| State | Incentive | Value (est.) |
|---|---|---|
| Massachusetts | SMART performance payments | $3,000-$6,000 over 10 years |
| New York | NY-Sun rebate | $0.20/W+ ($1,600+ for 8kW system) |
| New Jersey | SREC-II (Successor Solar Incentive) | $3,000-$5,000 over 15 years |
| Illinois | Illinois Shines SREC program | $3,000-$5,000 over 5 years |
| Maryland | State tax credit | 30% of cost, up to $1,000 (modest but stacks) |
| Connecticut | RSIP rebate (if still funded) | $0.10-$0.30/W |
| Minnesota | Solar*Rewards | Varies by utility, $0.04-$0.08/kWh |
| Oregon | Solar + Storage Rebate Program | Up to $5,000 solar + $2,500 storage |
| Rhode Island | REF rebate | $0.85/W for first 6 kW |
| South Carolina | State tax credit | 25% of cost |
Check DSIRE (dsireusa.org) for your state’s current programs. Some of these have limited funding and may be oversubscribed.
Property Tax Exemptions
Over 35 states exempt solar installations from property tax assessments. This means your home value increases (solar adds roughly $4/W per Lawrence Berkeley National Lab research), but your property taxes don’t rise to reflect it. This isn’t a direct incentive, but it protects your investment return.
Sales Tax Exemptions
About 25 states exempt solar equipment from sales tax. On a $30,000 system in a state with 6.5% sales tax, that’s $1,950 in savings. Check whether your state offers this.
How This Changes the Solar Decision
The math shifted, but by how much? Let’s compare before and after for the same system:
Before HR1 (2024-2025)
- System cost: $30,500
- Federal tax credit (30%): -$9,150
- Net cost: $21,350
- Annual savings (at $0.18/kWh, 12,000 kWh): $2,160
- Payback: 9.9 years
After HR1 (2026)
- System cost: $30,500
- Federal tax credit: $0
- Net cost: $30,500
- Annual savings (at $0.18/kWh, 12,000 kWh): $2,160
- Payback: 14.1 years
That’s 4.2 additional years to break even. In high-rate states, the gap is smaller (3 years). In low-rate states, it’s larger (5+ years).
With State Incentives (Massachusetts example)
- System cost: $30,500
- Federal tax credit: $0
- SMART payments (10 years): ~$5,000
- MA sales tax exemption: ~$1,900
- Property tax exemption: ongoing (protects ~$3,000/year in added value)
- Net effective cost: ~$23,600
- Payback: ~9 years
State incentives can recover 50-70% of what the federal credit provided, depending on where you live.
Strategies for Going Solar Without the Federal Credit
1. Lean Into State Programs
If your state has strong incentives (MA, NY, NJ, IL, OR, SC), the combination of state programs can bring payback periods close to where they were with the federal credit. Research every available program before getting quotes.
2. Consider a Lease or PPA
This is counterintuitive advice from a site that generally favors ownership, but hear us out. Solar leases and PPAs are offered by companies that qualify for commercial tax credits (Section 48), accelerated depreciation, and other business incentives. They pass some of that value to you through lower monthly rates.
In 2026, a PPA at $0.12-$0.15/kWh in a state where you’re paying $0.25/kWh saves you money from day one with zero upfront cost. You won’t build equity the way ownership does, but you also don’t need $30,000 in cash or a loan.
3. Time Your Purchase
Panel and inverter prices continue to decline. The Q4 2025 SEIA/Wood Mackenzie report projects another 5-8% decline in module costs through 2026 as US manufacturing scales up and global oversupply persists. Waiting 6-12 months might save $1,000-$2,000 on equipment, though this needs to be weighed against rising electricity rates and the possibility of state incentive programs running out of funding.
4. Right-Size Your System
Without the tax credit, oversizing your system is less forgiving financially. In net billing states especially, excess production exported at $0.05/kWh instead of $0.25/kWh is a poor return. Size your system to offset 80-90% of your usage (with room for future EV charging if planned), not 120%.
5. Bundle Strategically
Some state battery incentives survived independently of the federal credit. If your state offers battery rebates (California’s SGIP, Oregon’s rebate program, Maryland’s storage incentive), adding a battery to your solar project might qualify for separate incentive dollars even though the solar-specific federal credit is gone.
FAQ
Q: I signed a contract in 2025 but installation wasn’t completed. Do I qualify? Check the safe harbor provisions. If you had a binding contract and made a 5%+ payment before the effective date, you likely qualify. Get documentation from your installer and consult a CPA.
Q: Can I claim the credit if I install panels on a rental property? Rental property solar falls under commercial provisions (Section 48), not residential (Section 25D). If you own rental property and install solar on it, you may still qualify for commercial credits. Talk to a tax advisor.
Q: Will the residential credit come back? Unknown. Legislation could reinstate it, but there’s no active bill to do so as of February 2026. Don’t make purchasing decisions based on the hope of future credits.
Q: My installer says they can still get me the tax credit. Is that true? If they’re talking about a lease or PPA where their company claims commercial credits, that’s legitimate. If they’re claiming you can get the residential credit on a new 2026 installation, that’s wrong. Ask them to clarify in writing.
Q: Does this affect battery-only installations too? Yes. Section 25D covered standalone battery storage as well. Without it, battery installations lose the 30% credit. Some state battery incentives (like California’s SGIP) still exist independently.
The Honest Take
Losing the 30% federal credit hurts. There’s no way to spin it. For the average homeowner, it means $9,000+ more out of pocket and several additional years before the system pays for itself.
But the credit was always a bonus on top of solar’s core value proposition: locking in electricity costs against rising utility rates. That proposition still holds. Electricity rates increased 12% nationally between 2022 and 2025 (EIA data). If that trend continues, and there’s no reason to think it won’t (utilities are spending billions on grid upgrades and new generation), the cost of not going solar also rises every year.
The solar industry survived before the ITC existed. It survived the 2017 tariffs. It’ll adjust to this too, through lower equipment costs, more efficient installation practices, and creative financing. The question for homeowners isn’t whether solar will survive. It’s whether the math works for your specific situation in 2026.
For most homeowners paying above $0.15/kWh with decent sun and a willing roof, it still does. The payback is just longer than it used to be.
Sources: IRS Section 25D and Section 48 tax code provisions, HR1 budget reconciliation text, SEIA Solar Market Insight Q4 2025, EIA Electric Power Monthly, DSIRE state incentive database, Lawrence Berkeley National Lab research. Last updated February 2026.