form 5695 instructions solar tax credit

How do I claim the solar tax credit (ITC)? Form 5695 instructions

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If you’re considering solar, you’ve probably heard about the federal solar tax credit, also known as the Investment Tax Credit (ITC). The Federal ITC makes solar more affordable for homeowners and businesses by granting a dollar-for-dollar tax deduction equal to 26% of the total cost of a solar energy system.


What does 26% actually mean for the average solar shopper? According to EnergySage marketplace data, the average national gross cost of installing a solar panel system in 2021 is $16,860. At that price, the solar tax credit can reduce your federal tax burden by $4,618 – and that’s just one of many rebates and incentives that can reduce the cost of solar for homeowners. There’s plenty of information out there about the value of the residential ITC, but figuring out how to actually claim the credit when it comes time to file your taxes is another story. We’ll walk you through the instructions step by step from Form 5695 to Schedule 3/Form 1040.

Key takeaways


  • Claiming the federal ITC involves determining your tax appetite and filling out the proper forms
  • The federal ITC remains at 26% for 2021 and 2022
  • Start comparing solar quotes on the EnergySage Marketplace for maximum savings

Form 5695 instructions: the 3 steps to claim the solar tax credit

There are three broad steps you’ll need to take in order to benefit from the federal solar tax credit:

  1. Determine if you are eligible

    Make sure you have enough tax appetite to use the federal ITC against your total taxes.ITC three scenarios

  2. Complete IRS Form 5695

    This form validates your qualification for renewable energy credits, and can be obtained online.

  3. Add your renewable energy credit information to your typical Form 1040

    Loop your renewable energy credit information into your regular tax form.

First things first: am I eligible for the solar tax credit?

You are eligible for the Federal ITC as long as you own your solar energy system, rather than lease it. If you sign a lease agreement, the third-party owner gets the solar tax credit associated with the system. This is also true for the vast majority of state and local incentives for solar, although in some special cases a lease will grant you the financial benefits associated with the sale of solar renewable energy certificates (SRECs). You are also eligible even if the solar energy system is not on your primary residence – as long as you own the property and live in it for part of the year, you can claim the solar tax credit.

If your federal tax liability is lower than the total amount of your ITC savings, you can still take advantage of it by carrying over any remaining credits to the following year.

Here’s an example: You pay $20,000 to install a solar system on your home in 2021, which means you are eligible for a $5,200 federal solar tax credit. If your federal tax liability for 2021 is only $4,500, you will owe no federal taxes that year, and in 2022, you will reduce your tax liability by $700.

Instructions for filling out IRS Form 5695 for 2021

Claiming the ITC is easy. All you need to do is complete IRS Form 5695, “Residential Energy Credits,” and include the final result of that form on IRS Schedule 3/Form 1040.

Please note: At EnergySage, we are solar experts, not tax experts! Tax codes are complicated, so consult your tax advisor before deciding what is best for you.

Form 5695 instructions

Form 5695 calculates tax credits for a variety of qualified residential energy improvements, including geothermal heat pumps, solar panels, solar water heating, small wind turbines, and fuel cells. We’ll use the national average gross cost of a solar energy system as an example.

  • First, you will need to know the qualified solar electric property costs. That is the total gross cost of your solar energy system after any cash rebates. Add that to line 1.
  • Insert the total cost of any additional energy improvements, if any, on lines 2 through 4, and add them up on line 5.
form 5695 instructions
  • On line 6, multiply line 5 by 26%. This is the amount of the solar tax credit.
form 5695 instructions
Note: this is from the 2019 form when the ITC was still 30%.
  • Assuming you are not also receiving a tax credit for fuel cells installed on your property, and you aren’t carrying forward any credits from last year, put the value from line 6 on line 13.

Now you need to calculate if you will have enough tax liability to get the full 26% credit in one year.

  • Complete the worksheet on page 4 of the instructions for Form 5695 to calculate the limit on tax credits you can claim. If you are claiming tax credits for adoption expenses, interest on a mortgage, or buying a plug-in hybrid or electric vehicle, you will need that information here. (For this example, total federal tax liability is $7,000.)
form 5695 line 14
  • Enter the result on line 14 of Form 5695. Review line 13 and line 14, and put the smaller of the two values on line 15.
  • If your tax liability is smaller than your tax credits, subtract line 15 from line 13, and enter it on line 16. That’s the amount you can claim on next year’s taxes.
form 5695 instructions

Add credit to Schedule 3/Form 1040

The value on line 15 is the amount that will be credited on your taxes this year. Enter that value into Schedule 3 (Form 1040 or 1040-SR), line 5, or Form 1040NR, line 50.

form 5695 final step

The steps above outline all you need to do to have 26% of the cost of your solar panel system credited back to you! If you did energy efficiency improvements to your home in the same year, you may also need to complete page 2 of Form 5695. Either way, be sure to include Form 5695 when you submit your taxes to the IRS.


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283 thoughts on “How do I claim the solar tax credit (ITC)? Form 5695 instructions

  1. Noreen Carnley

    If you are a disabled and do not file or owe taxes so I have to file for the residential energy credit if I have solar panels

    Reply
  2. Rob

    My Mom has solar on her home. I’m not on title but I am on the solar agreement and help make payments. Can I still take advantage of the ITC?

    Reply
  3. Alan Yamamoto

    I recently had my solar and solar water heater installed about November and trying to get credit for it filing my 2020 taxes. My tax advisor is asking for a work order form from the Vendor and not sure what this form looks like. I would like to complete my taxes and also would like to show my vendor what this form looks like. Would someone let me know what this work order form looks like so I can work with my vendor?

    Reply
  4. steve

    My Solar project started at 2020 and ended at 2021. %20 of payment was at 2020 and I payed for the rest at 2021. How can I claim for the tax credit?

    Reply
      1. Thilak Raj Surendra Babu

        I think i would be in a similar situation for 2022, please let me know what you did?

  5. jess zap

    we purchased a home june 2020 that had leased solar panels, as part of the sale of the house, the lease of the panels were transferred over to us (being the new homeowners) and the lease was paid off in full by the sellers. Are we the new home owners able to claim this credit?

    Reply
    1. Jose

      No, because the credits were absorbed by the solar installer/financier to subsidize the initial cost of the system.

      Reply

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