Congratulations! You have a solar system. Your meter is spinning backward. Your electric bill is something to brag about. You’re even saving the planet.
Now it’s time to get some credit. Tax credit, that is. Let’s take a look at some approaches to filing for the Federal Investment Tax Credit (ITC). Before we begin, there is the standard disclaimer. We’re not accountants. So here we go:
We’re solar gurus, not tax gurus. This guide is offered as basic instruction only and is not meant as professional tax preparation advice. For specific tax-related questions or issues, we recommend consulting a certified tax preparation specialist or CPA.
First of all, technically, it’s not a solar credit. IRS form 5695 is to file for a Residential Energy Credit. More than just solar panels qualify. You can also use this for a solar hot water heater, wind power generation, geothermal, and fuel cells. There are nuances for each, but for our purposes, we’ll just focus on the credit associated with a residential solar panel installation.
To learn more about the solar tax credit, the U.S. Department of Energy published a great frequently asked questions solar guide.
Credit vs Refund
Credits are different than other tax-reducing tools and are not a refund, nor a deduction to reduce your adjusted gross income. This is a credit that you can apply to federal taxes you may owe. If you don’t owe taxes, the credit will need to carry over to another year (we’ll talk about that on Line 16 of the form).
Preparing for Filling Out Form 5695
Do all of your other taxes first. Has your 1040 already been completed? You’ll need to know your current tax liability before you can finish the form.
As discussed above, this is a credit and not a refund. You use this credit against your tax liability. Therefore, to access the tax credit, you need to have a tax liability. Not a problem for most people, but if your income isn’t taxable, or you have a significant number of deductions and credits, you may need a professional tax strategy. If you do have a tax liability, but get a refund because you overpay withholdings in your regular paycheck, you can still get the tax credit. You have two options:
- You can wait until tax time and add your credit to your refund. Note that the above restrictions apply. For example, if you have a liability of $6,000, but have paid $8,000 in withholdings throughout the year, you would normally get a $2,000 refund for your overpayment. However, if you had a solar tax credit of $10,000, that’s more than your $6,000 initial liability. You will apply $6,000 to your tax liability to make it zero and you will carry over $4,000 for next year’s taxes. With a new $0 tax liability, you will get all $8,000 of your withholdings as a refund, plus have $4,000 leftover to use as a credit next year.
- You can access your tax credit right away by lowering your weekly withholdings. You can safely do this knowing you have that tax credit waiting for you at tax time. Just don’t forget to change your withholdings back at the beginning of the next tax year.
What Qualifies
So the first step is understanding if your residential solar panels qualify for the tax credit. Unlike some of the other energy production measures, solar does not have any production or capacity restrictions to earn the credit. This solar incentive is limited to your principal residence and a second home; businesses will have a different process.
The Form
Form 5695 is very simple. Of the 16 boxes, most filers will only fill out a few. You will need this form if you installed a system in the tax year OR if you have any unused portion of your credit from previous years (see Line 12 of the form). Let’s dive in!
Line 1 – Qualified solar electric property costs
This is the entire purchase price of your solar system. To determine your final cost, you could look at your contract, adding any relevant change orders (if necessary), or your invoice. For some solar customers, there may be additional money you can apply to the cost. The instructions for the form say that qualifying costs, “…are costs for property that uses solar energy to generate electricity for use in your home…” Most interpreted this to mean all costs associated with providing a fully-functioning solar system. Qualifying expenses possibly include trenching, ground-mounting framing work, or even tree removal to enhance sun exposure. These expenses may be included in your solar contract or could be services provided by a third party such as a tree removal specialist.
Line 2 – 4 – Other qualifying expenditures
As mentioned above, Form 5695 can also refer to solar water heaters, wind, and geothermal measures. If these do not apply, you can comfortably skip these!
Line 5a + 5b – Qualified battery storage technology
Did you get a battery with your solar? If yes, you just check ‘Yes’ in Line 5a and enter your total battery costs in Line 5b. If not, you can skip this. Note: To qualify for the storage credit in 2025, the battery storage must have a capacity of at least 3 kilowatt hours.
Line 6a + 6b – Credit Calculation
In Line 6a, you add all qualifying costs from the above lines. If you just installed solar, you would just take the value in Line 1. For Line 6b, multiply Line 6a by 0.30 to calculate 30% of project costs. 30% is the 2022 – 2025 tax credit amount. If you are not able to use all of the tax credit for the filing year, in future years, you may use Line 12 to carry over any unused credit. This is a dollar amount and not a percent, so even if it takes you multiple years, you will still be using your original credit from the year you first filed for the credit. Put another way, if you have a $9,000 credit in a 30% credit year, you can get all $9,000, regardless of how the rate might step down for the next tax year.
Lines 7 – 11 – Fuel Cell Property
Doing anything crazy with fuel cells? Didn’t think so. For most solar customers, check “No” for 7a and leave Lines 7b, 7c, 8, 9, 10, and 11 blank.
Line 12 – Credit Carryforward
Only fill Line 12 if you could not capture the whole tax credit for the year you installed this solar system. For most solar customers, this will be blank. If this is your first time with the form, it will be blank. If we need to carry forward, we’ll add that later on Line 16.
Line 13 – Summed Credit Calculation
Time for some math again. We take Line 6b (your tax credit), add Line 11 (which should be zero and that’s easy math), and add Line 12 (which, in your first year, should also be zero and is still math we can handle).
Line 14 – Limitation based on tax liability
Line 14 is all about applying the credit to your tax liability. For that information, the IRS gives you a worksheet in the form instructions called i5695. This worksheet gives us a way to calculate Line 14. It’s a pretty easy worksheet, so let’s dive in!
- Form i5695, Section 1: We want to enter the total taxes you owe. That’s as simple as looking at your 1040 form and entering in the information from Line 18.
- Form i5695, Section 2: These lines talk about other credits. For most solar customers, this would be zero, but please check to see if any apply to you. If they do, put them in the corresponding line item and then add the total at the bottom of Section 2.
- Form i5695, Section 3: – Take the summed value from Section 2 and subtract the value in Section 1. For example, if Section 1’s value is $20,000 and Section 2 is $0, then the value for Section 3 should be $20,000. If the result were zero or less, you would enter -0-.
Line 15 – Residential clean energy credit
Now that we’re done with Form i5695, we’ll look at line 13 (the credit) and line 14 (the tax bill) and write in the number for whichever is lower.
Line 16 – Credit carryforward to 2026
If Line 15 is less than Line 13, then we subtract Line 15 from Line 13 (the tax credit) to find out how much of the credit will carry over to next year’s taxes.
Done!
Most of the math involved zeros so that news is almost as good as the big credit you have with the IRS. The last step is to take the amount on Line 15 of Form 5695 and copy that to amount on Schedule 3 (Form 1040), Line 5a.
Let’s do that disclaimer again for fun. Please check with a tax professional. There are so many variables that may relate to your unique situation. This guide is only intended to show you some of the more common approaches to claiming the tax credit.
Now, go outside and watch your beautiful solar panels soak up free energy and save you money. You’ve earned it!