The 30% federal residential solar tax credit (Section 25D) expired December 31, 2025. Here is who is still grandfathered in, how solar leases and PPAs work around the expiration, and what state incentives now drive the payback math for 2026 buyers.
The federal residential solar tax credit -- officially the Section 25D Residential Clean Energy Credit -- was the single most powerful financial incentive for homeowners going solar. For years, it allowed you to deduct 30% of your total system cost from your federal income tax bill. That era ended on December 31, 2025.
This guide explains exactly what changed, who is still grandfathered in, how solar leases and PPAs work around the expiration, and what state incentives now drive the payback math for 2026 buyers.
What Was the Federal Solar Tax Credit?
The Section 25D credit allowed homeowners who purchased and installed a solar panel system to claim 30% of the total installed cost as a direct reduction in their federal income tax liability. On a $25,000 system, that was a $7,500 credit -- not a deduction, but a dollar-for-dollar reduction in taxes owed.
The credit applied to the full installed cost: panels, inverter, racking, wiring, labor, and battery storage. It was non-refundable (you could not receive it as a cash refund if it exceeded your tax liability), but unused portions could be carried forward to future tax years.
The Credit Expired December 31, 2025
The Inflation Reduction Act of 2022 extended the 30% credit through 2032, but subsequent legislation terminated the residential portion (Section 25D) effective January 1, 2026. The commercial credit (Section 48) remains in effect for businesses and commercial installations.
For homeowners who purchased and had their system installed and operational by December 31, 2025, the credit is still claimable on their 2025 federal tax return (filed in spring 2026). If your system was installed in 2025, you are grandfathered in -- file IRS Form 5695 with your 2025 return.
Who Is Still Grandfathered In?
You can still claim the 30% credit if ALL of the following are true:
- Your solar panel system was installed and placed in service on or before December 31, 2025
- You own the system outright (purchased with cash, loan, or PACE financing -- not a lease or PPA)
- The installation was at your primary or secondary U.S. residence
- You have sufficient federal tax liability to absorb the credit (or carry it forward)
If your system was installed in 2025 but you have not yet filed your 2025 taxes, claim the credit on Form 5695 when you file. If your tax liability is less than the credit amount, the unused portion carries forward to your 2026 return.
The Lease and PPA Exception
Solar leases and Power Purchase Agreements (PPAs) work differently -- and this distinction matters more in 2026 than ever before.
When you sign a solar lease or PPA, you do not own the panels. The solar company owns the system and installs it on your roof. Because the installer is a commercial entity, they can still claim the commercial Investment Tax Credit (Section 48), which remains in effect. The installer factors this tax benefit into the pricing of your lease or PPA rate.
In practice, this means:
- Lease and PPA monthly rates in 2026 are often lower than what a loan payment would be on an owned system, because the installer's tax credit offsets their cost
- You do not get a lump-sum tax benefit, but you get a lower monthly rate from day one
- You are not responsible for maintenance, monitoring, or performance guarantees -- the installer handles all of that
- At the end of the term (typically 20-25 years), you can buy the system, renew the lease, or have it removed
For homeowners who do not have sufficient federal tax liability to use a large credit anyway -- retirees on fixed income, for example -- a lease or PPA may deliver comparable or better financial outcomes than ownership in 2026.
What Drives the Payback Math Now
Without the 30% federal credit, the payback period for an owned residential solar system is longer. A system that previously had a 7-9 year payback now typically runs 10-14 years, depending on your state, utility rates, and available local incentives.
The factors that now matter most:
Net metering policy. If your utility credits you at the full retail rate for excess power you send to the grid, your annual savings are maximized. States like New Jersey, Massachusetts, and Maryland have strong net metering programs. States that have moved to avoided-cost compensation (like California's NEM 3.0) reduce the value of daytime excess generation.
State tax credits. Several states offer their own income tax credits for solar. New York offers a 25% state credit (up to $5,000). South Carolina offers a 25% state credit. Maryland offers a $1,000 state grant. These credits are still fully in effect for 2026.
Sales tax exemptions. Most solar-friendly states exempt solar equipment from state sales tax. On a $25,000 system in a state with 6% sales tax, that is $1,500 in savings.
Property tax exemptions. Many states exempt the added home value from solar from property tax assessment. Without this, going solar could increase your annual property tax bill.
Rising utility rates. The average U.S. residential electricity rate has increased approximately 4% per year over the past decade. Every year your rate goes up, your solar savings go up proportionally -- which improves the long-term return even if the upfront payback period is longer.
State-by-State Incentive Examples
Here is a snapshot of what is still available in key solar markets in 2026:
New Jersey: SREC-II program pays $85-$95 per megawatt-hour produced. A typical 8 kW system earns 9-10 SRECs per year, worth $750-$950 annually on top of bill savings. Net metering at full retail rate. Sales tax exempt.
Massachusetts: SMART program pays a fixed rate per kWh produced for 10 years (currently $0.03-$0.06/kWh depending on utility and system size). 15% state income tax credit (up to $1,000). Net metering at full retail rate.
New York: 25% state tax credit (up to $5,000). NY-Sun Megawatt Block incentive for eligible systems. Net metering at full retail rate. Property tax exempt.
Colorado: Xcel Energy offers a $600 rebate for residential systems. Sales tax exempt. Net metering at full retail rate.
Georgia: Property tax exemption on added home value. Sales tax exempt. Net metering through Georgia Power. No state income tax credit.
Florida: Property tax exempt. Sales tax exempt. Net metering at full retail rate. No state income tax credit.
Should You Still Go Solar in 2026?
Yes -- with realistic expectations. The federal credit was a significant accelerant, but the underlying economics of solar are driven by electricity rates, sun hours, and system longevity. A well-installed system still produces power for 25-30 years. Utility rates are still rising. Net metering is still available in most states.
For 2026 buyers, the most important steps are:
1. Get multiple quotes from local installers -- prices vary significantly by market
2. Ask each installer to show you the payback calculation without the federal credit
3. Understand your state's net metering policy before signing anything
4. Compare the total 25-year cost of ownership versus a lease or PPA
5. Check your state's specific incentives using our Solar by State guides
Use our solar savings calculator to estimate your payback period based on your state, system size, and current utility rate.
Frequently Asked Questions
Is there still a federal solar tax credit in 2026?
No. The 30% residential solar tax credit (Section 25D) expired December 31, 2025 and is no longer available for homeowners who purchase systems in 2026. The commercial credit (Section 48) remains in effect for businesses and solar installers.
I installed solar in 2025 -- can I still claim the credit?
Yes. If your system was installed and placed in service by December 31, 2025, you can claim the 30% credit on your 2025 federal tax return (Form 5695). File your 2025 taxes as normal and include Form 5695. If your credit exceeds your 2025 tax liability, the unused amount carries forward to your 2026 return.
Do solar leases and PPAs still benefit from the tax credit?
Yes, indirectly. When you lease solar or sign a PPA, the installer owns the system and can claim the commercial Section 48 credit. They factor this into the pricing of your monthly rate, which is why lease and PPA rates are often competitive even without the residential credit.
What is the payback period for solar in 2026 without the federal credit?
Typically 10-14 years for an owned system, depending on your state, utility rates, and local incentives. This is approximately 2-4 years longer than the 7-10 year payback that was common when the 30% credit was available.
What state solar incentives are still available in 2026?
Many strong state incentives remain in effect: New York's 25% state tax credit (up to $5,000), New Jersey's SREC-II program, Massachusetts' SMART program, Maryland's $1,000 grant, and sales and property tax exemptions in most solar-friendly states. See our Solar by State guides for your specific state.
Is solar still worth it without the federal tax credit?
For most homeowners in high-sun, high-rate states, yes. The payback period is longer, but the system still produces power for 25-30 years and protects against rising utility rates. The financial case is strongest in states with strong net metering, state tax credits, or SREC programs.
