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.
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
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
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.
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 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
Step 2: Insert Any Additional Energy Improvements to Line 2 - 4
Step 3: Add total Solar Tax Credit Amount on Line 6
Step 4: Have former tax credit or fuel cells? If not, copy Line 6 to Line 13
Step 5: If You Have Enough Tax Liability. Add to Line 15
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.
If you are considering solar for your home or need help comparing solar quotes, contact our team. We strive to provide you with the best solar installation service possible, from our high-quality workmanship, along with outstanding customer care. We understand the stress that comes with shopping for solar. Regardless of the size or scope of your solar installation problem, our solar installers have the experience, skills, and the latest equipment to accomplish any solar panel job to your satisfaction.
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