How to Claim the Solar Panel Tax Credit (ITC)

May 27, 2020

Legal Disclaimer: At Everlight Solar, we are solar experts, not tax experts! Tax codes are complicated, so consult your tax advisor before deciding what is best for you. If you have questions regarding your Federal Investment Tax Credit or IRS Form 5695, do not refer questions to your Energy Consultant or Everlight Solar. Rather, you should discuss your situation with your CPA or other qualified tax advisors. Everlight Solar is not responsible for or liable for any errors or omissions in regards to your personal tax and finance situation or obligations. The following is for informational purposes only, and should not be considered instructions or legal advice.

If you have been researching solar, you have most likely come across the Investment Tax Credit (ITC) from the federal government, which helps homeowners and businesses go solar at a more affordable rate by offering a tax deduction equal to 26% of the total cost of a solar system.

This means if your solar system costs $20,000, the solar panel tax credit can reduce your federal tax burden by $5,200. This is just one of the many incentives in place that can reduce the solar cost for homeowners and businesses. This is a guide to help you actually claim the ITC on your taxes.

ELIGIBILITY

To be eligible for the Federal ITC, you must own your solar system. If you have a lease agreement, the third-party owner gets the tax credit for that system. If the home that you want a solar system for is not your primary residence, you are still eligible for the tax credit as long as you own the property and it is not a rental. Here is a quote from the U.S. Department of Energy guide:

“Solar PV systems do not necessarily have to be installed on your primary residence for you to claim the tax credit. However, the residential federal solar tax credit cannot be claimed when you put a solar PV system on a rental unit you own, though it may be eligible for the business ITC under IRC Section 48.11”

Homeowner’s Guide to the Federal Tax Credit for Solar Photovoltaics – U.S. Department of Energy

The other piece of eligibility is knowing your federal tax liability. If this is lower than your ITC savings, you will be able to carry over remaining credits to the following year. For example, using our $20,000 system example, you are eligible for $5,200 ITC. If your federal tax liability for 2020 is only $4,000, you will owe no federal taxes that year, and in 2021, you will be able to use the extra $1,200 to reduce your tax liability.

IRS Form 5695

To claim the ITC all, you must do is fill out the IRS Form 5695 “Residential Energy Credits” and include your result on your IRS Form 1040.

Form 5695 is used for a variety of qualified residential energy improvements. We are going to be using a solar example, obviously.

First, you need to know the gross cost of your solar system after any cash rebates. This goes on line 1. Include any additional improvements, if any, on lines 2 through 4 and add them up on line 5.

On line 6, multiply line 5 by 26%.

form 5695 instructions

If you are carrying forward any credits from last year, you would skip to line 12 and insert the amount there. If not, you will put the amount from line 6 to line 13.

Next, complete the “Residential Energy Efficient Property Credit Limit Worksheet” on page 4 to calculate if you have enough tax liability to get all 26% in one year. You will need all the tax credits that you are claiming here. For this example, we will use $4,000 total liability, so this would go on line 11.

form 5695 line 14

This goes on line 14 of Form 5695. Compare line 13 and line 14 and place the smaller of the two on line 15. If line 15 is lower than line 13, subtract them and enter that on line 16. This is the amount of tax credit that you can claim next year.

form 5695 instructions

You will need to use Schedule 3 (Form 1040 or 1040-SR).

The value on line 15 is the amount that can be credited on your taxes for this year. You will enter that amount into Schedule 3 (Form 1040 or 1040-SR) line 5 and add it with any other credits for line 7.

form 5695 final step

This will then be transferred to your Form 1040 on line 13b.

These steps outline what you need to do to have 26% of your solar panel system cost credited back to you. If you did additional energy improvements to your home in the same year, you may need to complete page 2 of the Form 5695. Be sure to include the Form 5695 when you file your taxes.