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.
- Claiming the federal ITC involves determining your tax appetite and filling out the proper forms
- The federal ITC remains at 26% for 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:
- Determine if you are eligible
Make sure you have enough tax appetite to use the federal ITC against your total taxes.
- Complete IRS Form 5695
This form validates your qualification for renewable energy credits, and can be obtained online.
- 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 2022, 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
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.
- On line 6, multiply line 5 by 26%. This is the amount of the solar tax credit.
- 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.)
- 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.
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.
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.