Solar Tax Credits Over Time: The History of Home Solar’s Best Incentive

The federal solar tax credit has gone by many names over the years, including the Investment Tax Credit (ITC), the Energy Efficient Property Credit, and, most recently, the Residential Clean Energy Credit. Regardless of its name, one thing is certain — tax credits have played a key role in helping millions of Americans switch to solar. According to data from the Internal Revenue Service (IRS), the solar tax credit was claimed on over 752,000 tax returns in 2023 alone.

Let’s look at the history of this essential solar incentive and how it’s shaped the home solar industry. 

Solar tax credit timeline

1978 - Residential Energy Credit was established for solar thermal systems

Foreign oil embargos triggered an energy crisis in the 1970s, causing oil and gas prices to skyrocket. Conservation became a national priority, with President Jimmy Carter delivering his well-known “Sweater Speech,” a fireside chat where he urged Americans to embrace energy conservation in their daily lives. 

A little over a year after this speech, President Carter passed the Energy Tax Act of 1978, which created the very first iteration of a federal tax credit for solar installations in the U.S., called the Residential Energy Credit. It provided tax credits for homeowners who invested in energy conservation or renewable energy upgrades. 

Homeowners who installed renewable energy equipment after April 20, 1977, like solar thermal systems, would earn a tax credit of:

• 30% of the first $2,000 of installation expenses

• 20% of the next $8,000 of installation expenses 

1980 - Residential Energy Credit increased to 40%

In 1980, the Residential Energy Credit for renewable energy systems was updated with the passage of the Crude Oil Windfall Profit Tax Act. Signed into law by President Carter, this legislation aimed to recover federal revenue from domestic oil producers, and it included changes to the Residential Energy Credit. 

The new version of the incentive included more explicit language to cover both solar thermal and solar photovoltaic systems. Most notably, it bumped up the credit value to 40%. A solar system could now earn a tax credit equal to 40% of its costs, so long as the system cost did not exceed $10,000.

1985 - Residential Energy Credit expires

By 1985, the energy crisis cooled down, and oil and gas prices returned to pre-crisis levels. At the same time, President Ronald Reagan’s administration took a step back from renewable energy, cutting funding for solar research. In 1986, he even removed Jimmy Carter’s solar panels from the White House. 

With diminished political support, the Residential Energy Credit expired without a second thought. Without federal incentives and research, residential solar adoption slowed, becoming more of a niche interest for technology enthusiasts and hardcore environmentalists rather than a practical choice for everyday homeowners. 

2005 - The Energy Policy Act creates a new solar tax credit

In an effort to reduce reliance on foreign oil and stabilize American energy security, President George W. Bush signed the Energy Policy Act of 2005, introducing the Residential Energy Efficient Property Tax Credit — the modern version of the national solar tax credit. 

This new incentive provided a tax credit equal to 30% of system costs, up to $2,000, and was set to expire at the end of 2007. 

2006 - Expiration date pushed by one year

To help further improve the economy, President Bush passed the Tax Relief and Health Care Act of 2006. The Act extended energy tax credits, including the Residential Energy Efficient Tax Credit, in an attempt to meet Bush’s goals of decreasing American dependence on foreign oil. 

Initially set to expire on December 31, 2007, the incentive’s expiration date was pushed to December 31, 2008.

2008 - Bank bailout bill extends credit; removes incentive cap

President Bush’s Emergency Economic Stabilization Act of 2008 is best known for bailing out Wall Street during the Great Recession, but it also included key energy provisions like an eight-year extension of the home solar tax credit.

Instead of sunsetting on December 31, 2008, the solar tax credit would be available for homeowners until December 31, 2016. Additionally, it removed the $2,000 limit, making it an even better incentive for homeowners looking to invest in renewable energy.

2015 - A step-down schedule is created; expiration date pushed again

Once again, the residential tax credit was extended, this time through a consolidated appropriations bill signed by President Barack Obama. An extension wasn’t the only change made to the Residential Energy Efficient Tax Credit; the bill also instituted a step-down schedule to phase out the credit over the next six years:

• 30% for installations after December 31, 2016 and before January 1, 2020

• 26% for installations after December 31, 2019 and before January 1, 2021

• 22% for installations after December 31, 2020 and before January 1, 2022

• 0% for installations after December 31, 2021

Tax credits for commercial installations and production tax credits had different expiration schedules. 

2020 - Tax credit value drops to 26%

The tax credit reached the first step of its phase-down in 2020, when it reduced from 30% to 26%. Despite the decrease, savings from the incentive were still substantial. However, it’s impossible to tell just how much of an effect it had on the industry, as the step-down coincided with the COVID-19 pandemic, which substantially impacted home solar. 

2020 - Two year extension 

Just like in 2016, the solar tax credit was extended again through an annual consolidated appropriations act at the end of 2020. The bill included COVID-19 relief provisions and an omnibus spending bill to prevent a government shutdown. 

Under the Consolidated Appropriations Act, 2021, signed by President Donald Trump, the tax credit schedule was amended to the following:

• 26% for installations after December 31, 2019 and January 1, 2023

• 22% for installations after December 31, 2022 and before January 1, 2024

• 0% for installations after December 31, 2023

2022 - Inflation Reduction Act expanded and extended tax credit until 2035

One of the most significant pieces of climate legislation in the United States is the Inflation Reduction Act of 2022. As part of President Joe Biden’s historic bill, the home solar tax credit’s expiration date was not only extended until 2035 but its value was also re-upped to 30% (from the previous 26%) until 2032. 

The 30% tax credit is now available until the end of 2032 when it begins a step-down period: 

• In 2033, it falls to 26%

• In 2034, it falls to 22%

• In 2035, the tax credit will expire

The IRA also gave the tax credit a new name  — the Residential Clean Energy Credit.

2025 - The solar tax credit remains an integral part of the solar industry

Over the last two decades, the solar tax credit has spurred millions of dollars worth of growth in the solar industry and helped the U.S. build over 5 million solar installations nationwide. The Investment Tax Credit (ITC), the commercial version of the residential energy credit, has also contributed heavily to the expansion of solar. 

The importance of government research and incentive programs like these became clear when President Reagan defunded solar programs and allowed President Carter’s energy credit to expire. While solar is more affordable than ever for homeowners, ongoing government support is key to the industry’s long-term success. 

Threats to the solar tax credit are threats to our nation’s growth and independence. Solar can help us reach our goals, but only if we let it.