IRS Form 5695 Explained - Claim Solar Tax Credit

One of the reasons you may have gone solar for your home is the Federal Investment Tax Credit (ITC), commonly known as the Solar Tax Credit. The Federal ITC makes solar energy more affordable for homes and businesses to go solar. The Solar Tax Credit gives a dollar-for-dollar tax deduction equal to 30% of a solar energy system’s total cost in 2022.

What does 30% mean for the average solar shopper? In 2022, the average gross cost of our installed solar panel system was $20,378. At that cost, the Federal Investment Tax Credit can reduce your federal tax burden by $6113.4.

It is easy to find information about how the Federal ITC makes going solar much more affordable, but nothing about properly claiming it on your taxes. You should always consult your certified tax professional for any tax-related advice, but we will take you through a step-by-step guide on the most important takeaways regarding the two forms that you will need IRS Form 5695 and IRS Form 1040.

Key takeaways:

You should always consult with your certified tax professional for any tax-related advice.
Filing your taxes to claim the Federal ITC is a matter of filling out the proper IRX tax forms.
Make sure to check eligibility.
As of 2021, the Federal ITC stepdown goes from 26% to 22% in 2023. Eventually fading away (0%) for homes in 2024.

3 Steps to Claim the IRS Federal Solar Tax Credit

When filing your taxes there are three (3) additional steps you will need to do when your federal taxes to claim the Federal Solar Tax Credit. Make sure that you are eligible.

1. Make sure you have a tax liability to use the Federal ITC against.

For people who are retired or on welfare, the Federal ITC won’t be a benefit. You made energy-saving improvements to your home located in the USA. The house does not have to be your main home.

Pro Tip: Includes: House, houseboat, RV, cooperative apartment, and condo. Download and Fill Out IRS Tax Form 5695

Download: https://www.irs.gov/forms-pubs/about-form-5695

2. IRS Form 5695 is the Residential Energy Credit Form Add Residential Energy Credit Information to Your Form 1040

3. Include the residential energy credit information to your regular IRS Form 1040

Step 1: Am I eligible for the solar tax credit?

Own the solar energy system
Have a federal tax liability to use the ITC against
Went solar for your home in the USA

Pro Tips:

It does not have to be your main home as long as you own the home and lived in it for part of the year. Your “home” can include a houseboat, RV, cooperative apartment, and condo.

Do you own the solar panel system or lease?

To be eligible for the Federal ITC, you must own your solar energy system. You do not qualify if you went solar with a solar lease or solar Power Purchase Agreement (PPA). If you have solar through a lease or PPA, the solar financing or solar company gets the Federal Tax Credit associated with the system.

Do you Have a Federal Tax Liability?

If you don’t have a Federal Tax Liability, the Federal ITC may not benefit you. If your Federal Tax Liability is lower than the total amount of your Federal ITC claim, you can carry the remaining tax credits to the following year.

Here’s an example:

Suppose you installed a $25,000 solar energy system in 2021. You can claim a 30% tax credit. This means you are eligible for a $7,500 Federal Investment Tax Credit.

We took the Solar PV System’s total cost and multiplied it by the year's tax credit amount. This gave us $25,000 * 30% = $7,500.

Suppose your Federal Tax Liability for 2022 is only $3,000. In that case, you will owe no federal taxes, and in 2021 you will be able to carry over a $4,500 credit to reduce your 2021 Federal Tax Liability.

Step 2: Instructions for 2021 Solar Tax Credit IRS Form 5695

Claiming the Federal ITC is straight-forward. The hardest part is downloading and completing the Residential Energy Credits Form, IRS Form 5695.

IRS Form 5695 instructions

IRS Form 5695 is needed in your Federal tax filings to calculate the number of tax credits you can gain from your qualified home energy improvements. These home improvements include geothermal heat pumps, solar panels, solar batteries, solar thermal pool heating, fuel cells, and small wind turbines.

Step 1: Add Qualified Solar Electricity Costs to Line 1

The total gross cost of your solar energy system after any cash rebates.

Step 2: Insert Any Additional Energy Improvements to Line 2 - 4

Add any additional energy improvement costs, if any, on lines 2 through 4. Add the total value on line 5 of Form 5695.

Step 3: Add total Solar Tax Credit Amount on Line 6

Multiply Line 5 by the Federal Tax Credit Percentage (30% in 2022). This is the total Solar Tax Credit Amount that should be written on Line 6.

Step 4: Have former tax credit or fuel cells? If not, copy Line 6 to Line 13

Copy the value from Line 6 to Line 13. Exceptions: You are receiving a tax credit for fuel cells installed on your home or carrying forward the previous year’s tax liability.

Step 5: If You Have Enough Tax Liability. Add to Line 15

Download and complete page 4 of the instructions for Form 5695 to calculate if you have any limits on tax credits you can claim this year. Enter the result on Line 14 of Form 5695. Compare Line 13 and Line 14, and put the smaller of the values on Line 15.
Carryover Tax Liability: If your Federal Tax Liability is smaller than your tax credits, subtract Line 15 from Line 13. Input that number on Line 16. Line 16 is the amount you can claim on next year’s federal taxes.

Step 3: Add Solar Tax Credit Amount to IRS Form 1040

The value on IRS Form 5695 Line 15 is the amount that will be credited on your Federal tax filings. Copy that value onto your IRS Form 1040, Line 53.

The steps above outline what you need to do to claim the Federal Solar Tax credit when you file your taxes with the IRS. Be sure to include IRS Form 5695 when you submit your tax filings to the IRS.

Additional Energy IRS Tax Credit Resources

Solar Tax Credit Forms: IRS Tax Form 1040 and Form 5695
Solar Tax Credit Forms: About IRS Form 5696 and IRS Form 1040 Instructions
Related Items: EV IRS Form 8936 and Instructions for EV IRS Form 8936

Solar Federal Tax Credit

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