There are two versions of the federal solar energy tax credit: the Residential Renewable Energy Tax Credit (a personal tax credit) and the Business Energy Investment Tax Credit (corporate tax credit). This article is about the residential version.
Updated 08/25/22 – The Cut Inflation Act increased the federal solar tax credit to 30% (retroactive for grid-connected and hybrid systems installed anytime in 2022) and the extended to off-grid (standalone) systems installed after 12/31/22. The IRS has not yet released its revised Form 5695, so our example below uses the 2021 version and the 26% tax credit amount.
One of the biggest immediate benefits of installing a solar electric system is that it comes with a significant federal tax credit. It’s called the Solar Investment Tax Credit (Solar ITC) and allows the system owner to reduce the amount of federal tax they owe by 30% of the cost of the system for the year during from which the system was installed. Of all the renewable energy incentives available for solar systems, this is the most substantial – and among the easiest to take advantage of.
Who can claim the Federal Solar Tax Credit (Solar ITC)?
A US taxpayer can claim the solar ITC when they have a solar electric system installed and used by a residence that is both owned and used by the taxpayer as a primary or secondary residence. In addition to owning the residence, the taxpayer must also own the solar system itself.
Ownership of the residence and the solar electric system equipment is essential. If you switched to solar energy through a lease or power purchase agreement, you will not be able to claim this tax credit.
Installation and commissioning of the system can be done either by a hired contractor or by the owner. A DIY solar system installation may be eligible for the Solar ITC as long as all other eligibility requirements are met.
Examples of systems not eligible for Solar ITC:
- Systems installed in a rental property owned by the taxpayer
- Systems that have been modified since their original installation
- Systems that were installed and started to be used in a year before the tax year for which you are trying to claim the solar ITC
- Systems not directly owned by the taxpayer, including systems installed under an equipment lease or power purchase agreement
Which parts of a solar electric system are covered by the solar ITC?
The Solar ITC is more than a tax credit for solar panels. It also covers:
- Balance of system components (inverter, solar panel mounting equipment and wiring)
- Batteries and energy storage devices that charge exclusively from solar panels*
- Cabling and management software for eligible batteries and energy storage devices
- Shipping costs for all eligible equipment
- Contractor labor for site preparation, permitting, original installation and inspection
- Tools purchased or rented specifically for system installation if you did a do-it-yourself installation
- Sales tax on all equipment and labor listed above
*Batteries and energy storage devices must be intended to be added to the system in its second year of use in order to qualify for the Federal Solar Tax Credit.
Does the federal solar tax credit carry over to the next year?
Yes. The solar ITC amounts to 30% of the cost of components and installation of the solar electric system. If this amount exceeds your tax payable, the remaining amount can be claimed against next year’s taxes. The Federal Solar Tax Credit form (Form 5695) includes lines for designating and claiming a carryover to the next year (called a “carryover” on the form).
Claim the Federal Solar Tax Credit with Form 5695
To download IRS Form 5695 here, then complete it following the instructions on the Form 5695 itself. Use the detailed instructions on the IRS website for further assistance and if needed. Here is an example of how it would look for a solar electric system where you purchased the equipment from altE and then did the installation yourself.
- Line 1: Enter the gross eligible equipment cost and installation costs of your solar electric system, less any initial/cash reimbursement you have already received for it. As with all US tax forms, amounts should be rounded to the nearest dollar. In our example, the equipment cost, sales tax, and shipping would all be on the bill and there would be no installation cost since it is DIY installation.
- Lines 5 and 6: Perform the simple calculation as shown to calculate your total solar ITC amount.
- Line 12: Only needed if you first claimed the solar ITC in the previous tax year and are carrying an unused portion forward to this year.
- Line 13: Complete the simple calculation as shown. If you don’t have a solar ITC carried forward from last year, this will simply be the amount you entered on line 6.
- Line 14: This is the amount of tax payable after any other tax credits you are claiming. This determines whether you can take advantage of the full amount of the solar ITC (line 6) this year or whether you have to carry some of it over to next year. Enter the amount from line 3 of the worksheet on page 4 of Detailed Form 5695 Instructions. In our example, we will assume $2,500 of tax payable to apply the solar ITC.
- Line 15: Perform the simple calculation as shown to determine the amount of solar ITC you can claim for the current tax year.
- Line 16: Perform the simple calculation as shown to determine if you can carry over any of the solar ITCs to next year.
Once Form 5695 is completed, you will have your tax credit amount for the current tax year (line 15), which you can then include on line 5 of Schedule 3 of your Form 1040. In our example, we are claiming $2,500 of our total solar ITC amount, with the remaining $388 being carried forward and allowing us to enter it on line 12 of Form 5695 next year.
In addition to the Federal Solar Tax Credit, be sure to check out other solar rebates and renewable energy incentives in your state, which can work together to save you up to 50% or more on your installed solar system!
This article is for informational purposes only and should not be considered tax advice, legal advice or accounting advice.