Please note: this article was updated on 1/1/2020 to reflect a step-down of the Investment Tax Credit from 30% to 26%.
How do I claim the Solar Tax credit?
If you’re considering adding solar power to your home or business you have probably heard there are generous incentives to help reduce the overall cost of your system. One of the most important incentives is the federal income tax credit called the Investment Tax Credit (ITC). Under the ITC, home and business owners can receive a tax credit they can use to offset part of their federal income tax bill.
Unfortunately, the solar tax credit is set to phase out starting in 2020 when eligible home and business owners can receive up to 26% of the total cost of their solar energy system back. Depending on the cost of your system, this could be worth thousands of dollars you otherwise would be paying to the government.
An Incentive for Good
The purpose of this tax credit is to encourage home and business owners to invest in energy-saving technologies like solar PV. Not only do you benefit by reducing your tax burden, but your local community benefits as well through a cleaner energy mix. As more Americans switch to solar, it means a transition away from polluting sources like coal and natural gas that are damaging our health and environment.
Who is Eligible for the Solar Tax Credit?
To be eligible for the solar tax credit, you must be the owner of your solar system and have some federal tax liability. Don’t worry if your liability is initially lower than savings from the solar tax credit, remaining credit rolls over to the following year. If you lease or use a Power Purchase Agreement (PPA) for your system, the party you are leasing or purchasing power from is eligible to claim the tax credit instead of you. This is an important consideration when choosing a solar installer and deciding how to make solar work for your situation.
You are also able to claim the ITC for non-primary residences, again so long as you own the property and reside there part of the year.
Filing The Right Forms
Once you have determined that you are eligible for the ITC, the next thing to do is make sure you have the required tax forms. You will need to file IRS Form 5695, the “Residential Energy Credits” form and then use it to complete another section on your standard 1040 form. This sounds complicated but the form is relatively straight forward.
On Form 5695, you will enter the total cost of your solar system on the line labeled “qualified solar electric property costs.” Keep in mind this number is the total cost of your system including parts and installation, minus any cash rebates you received. Let’s say your total cost was $9,000. The next step is to multiply your qualified costs by 26%. [$9,000 x 0.26 = $2,340]. Write the calculated total on the last line of your Form 5695.
The final step to claiming the solar tax credit is to determine if you have enough tax liability for the total deduction. This depends on your income and other factors affecting your total federal tax liability. Don’t worry! If your ITC deduction exceeds your tax liability, you can carry it over to next year’s taxes and deduct the remainder then. The final page of Form 5695 will take you through the calculation and will tell you to transfer the proper figure to your 1040 form.
At this point, you can file your taxes as you normally would, with the assurance that you have saved a bundle! Haven’t gone solar yet? There’s still time to claim the 26% federal tax credit for solar energy systems in 2020! The first step is to obtain a free quote to discover your home or business’s solar and savings potentials.
Sam Henke is a writer and sustainability professional living in Boulder, Colorado. He is a recent graduate of a Professional Master's Degree focusing on Sustainable Food Systems, supplementing his broader experience in sustainability consulting, marketing, strategy, and communications. For more information or project proposals, contact Sam at [email protected] or connect with him on LinkedIn.