Tax season is upon us once again, and for new home solar panel owners, that means it’s time to claim your solar tax credit.
Claiming your solar panel tax credit is a fairly straightforward process, but with multiple forms to fill out and calculations to be done, it can get a little confusing. To help simplify things, Boston Solar has put together a step-by-step guide to claiming the Federal Solar Investment Tax Credit (ITC) for homeowners. While we are here to help you, we also always recommend you speak to your tax advisor to review and confirm how solar energy tax credits apply to your personal tax situation.
Step One: Determine Eligibility For Solar Tax Credit
Before you can claim your federal tax credit for solar, you need to make sure you’re eligible to receive it. It’s best to determine eligibility at the start of your residential solar installation project, as you’ll need to save all related receipts in order to claim your credit.
For homeowners, determining eligibility is easy. You likely qualify for the federal tax credit for residential solar energy if you meet the following criteria:
You have taxable income
You own your solar panel system (no leases or PPA)
You own the property your solar system is installed on
Your system is located at and generating electricity for your primary or secondary residence, located in the United States
If your solar panels are installed at a property that you rent out, things get a little more complicated. If you live at the residence for some portion of the year, you can still claim the credit, but it will be reduced. In these situations it is best to speak to your tax advisor.
It’s also important to note that, because the tax credit is on a declining schedule, the date your installation is completed and switched in service affects eligibility. For projects completed in 2020 through 2022, homeowners are eligible for a 26% tax credit, thanks to a recent extension of the solar tax credit. However, that number will drop to 22% in 2023 and then eliminated in 2024. To receive the current 26% credit, your system must be installed and placed in service by December 31st, 2022.
Step Two: Complete IRS Form 5695 Residential Energy Credits
Once you know that your system qualifies for the solar tax credit, you can move forward with claiming your credit. To start, you’ll need to fill out IRS Form 5695—Residential Energy Credits. Form 5695 is used to calculate tax credits for residential energy improvements, including solar panels, geothermal heat pumps, wind energy, and more. (If you installed a commercial solar energy system, you would claim the ITC on IRS Form 3468 - Investment Credit.)
To complete Form 5695, you’ll need to calculate the total cost of your solar panel system, including solar batteries. This includes all labor, material, and installation costs associated with your solar energy project. If you received any cash rebates for your solar panel installation, subtract them from the total cost of your solar installation.
Once you’ve calculated the total cost of your solar panel project, write that number on the first line of your solar tax credit form (Form 5695). Provided that you are not claiming any other energy credits, you can then skip down to line five, where you’ll write that same number in again. Then, multiply by 26% (for installs placed in service in 2020, 2021, or 2022) and write the result on line six.
In the example below, we’ve filled out lines 1 through 6 on Form 5695 using a total solar installation cost of $30,000 as an example.
The rest of Form 5695 deals with fuel cells and tax credits that are being carried over from a previous year. If neither of those situations applies to you, you can skip down to line number 13 and write in the same number that you wrote in for line number six—$7,800 in our example.
Step Three: Add Renewable Energy Credit to Form 1040/Schedule 3
Now that you know how much your solar federal tax credit is worth, you need to add that information to Form 1040/Schedule 3. On line 5 of Schedule 3, write in the same number that you wrote for line 6 of Form 5695—in our example, $7,800.
And that’s it, you’re done! Just remember to attach Form 5695 when you file your taxes.
In our example, you would receive a dollar-for-dollar tax credit for $7,800, which means you would be able to reduce your federal tax liability by that amount. If the credit is worth more than you owe, you can rollover the remainder and apply it to your federal taxes in the following year.
*DISCLAIMER: While this blog post discusses solar tax credits and filing your returns, you should ALWAYS consult your tax professional for your specific situation. We do not assume responsibility for your tax situation or credits.
Have questions about how the federal solar tax credit works? Boston Solar has the answers. Give us a call at 617-858-1645 or get in touch here.