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March 18, 2021
The Federal Solar Investment Tax Credit (ITC) is one of the most lucrative incentives available to homeowners who install solar energy systems, and with tax season upon us, you may be wondering “How does the federal solar tax credit work?” or “How do I claim the federal solar tax credit?”
For most of us, taxes are a little confusing, and figuring out how to claim your solar credit can be difficult. To help you navigate the process, Energy Solution Providers has created an easy-to-follow guide for homeowners explaining how to claim the solar tax credit in 2021 and the remaining years of the ITC.
We’re here to help with all of your solar needs, but we want to note that we’re solar experts, not tax experts, and we always recommend speaking to your tax advisor before filing to confirm your unique tax situation.
Step One - Confirm Eligibility
The first step to claiming your solar tax credit may seem obvious, but it’s important to make sure you’re eligible to receive the ITC before you start filling out the paperwork. To qualify for the federal solar tax credit, you must:
Have taxable income
Own your solar panel system (leases and PPA don’t qualify)
Own the property your solar panels are installed on
Be using your solar panels to generate electricity for your primary or secondary residence, located in the United States
Because the solar panel tax credit is on a declining schedule, the installation and ‘placed in service’ date matters when it comes to claiming your credit. For 2021 and 2022, the tax credit is at 26%, and in order to claim it, your system must be placed in service (turned on) by December 31, 2022. After that, the credit will drop down to 22% in 2023 and finally eliminated for homeowners in 2024 unless it is extended again.
Step Two - Gather Your Receipts
The solar federal tax credit allows you to claim a percentage of the total cost of your solar installation as a credit towards your federal taxes due, and you’ll need to calculate the total cost of your solar project in order to claim it. You can do this by adding up all costs associated with your solar installation, and then subtracting any cash rebates that you received.
Step Three - Fill Out the Residential Energy Credits Form (IRS Form 5695)
Now that you know the total cost of your solar installation, you can start filling out the correct tax forms. First, you’ll need to complete IRS Form 5695—Residential Energy Credits.
Let’s say that your solar installation cost $25,000. You’ll take that number and write it on the first line of Form 5695. The next three lines deal with other types of renewable energy credits. If you are not claiming any other credits besides the federal tax credit for solar, you can write 0 on lines 2-4. Then, write the total of lines 1-4 on line 5 (25,000 in our example). Finally, multiply the number you wrote on line 5 by 26% (for solar installs completed in 2021 and 2022) and write it on line 6.
25000 X 0.26 = 6500
The number you write on line 6 is the amount your credit is worth - $6,500 in our example.
If you are not carrying over tax credits from a previous year or claiming a credit for fuel cells, you don’t need to worry about the rest of form 5695. Just skip down to line 13 and write in the same number that you wrote on line 6 ($6,500 in our example).
To determine whether you have enough tax liability to use the full credit in one year, you’ll need to fill out the Residential Energy Efficiency Property Credit Worksheet. When complete, enter the result on line 14.
Now, look at lines 13 and 14. Take the smaller of those two numbers and write it on line 15. If your tax liability is less than the amount the credit is worth, subtract line 15 from line 13 and write the result on line 16. You can roll that amount over and apply it to next year’s taxes.
Step Four - Add Your Solar Tax Credit to Form 1040/Schedule 3
The final step in the process is adding your solar tax credit to your usual Form 1040. You’ll need to use Schedule 3 to do this. On line 5 of Schedule 3, write in the amount your credit is worth (the same number you wrote on line 6 of Form 5695—6,500 in our example).
And that’s it, you’re all set to file!
DISCLAIMER: Energy Solution Providers does not assume any responsibility for your tax situation and we recommend speaking with a tax professional about your specific situation before filing.
Reach Out to Energy Solution Providers with Your Solar Questions
Energy Solution Providers is proud to be a leading solar energy company in Arizona, and we’re here to answer any questions you have about the federal tax credit for residential solar energy and the state of the solar tax credit in 2021. Whether you’ve already installed solar panels and have follow-up questions or are interested in having a solar battery system installed at your home, our team can help.