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Federal Solar Tax Credit | Eligibility, Benefits, Form 5695 & How to Claim ?

Federal Solar Tax Credit


What is the Federal Solar Tax Credit ?


The federal solar tax credit is a tax credit that can be claimed as a percentage of the cost of a solar photovoltaic (PV) system on federal income taxes. The system must generate electricity for a home located in the United States and be put into service during the tax year. In December 2020, Congress passed an expansion of the Solar Tax Credit, providing a 26% tax credit for systems installed in 2020-2022 and 22% for systems installed in 2023 and it expires in 2024 unless Congress renews it.

The federal residential solar energy credit is one of the most important incentives for homeowners looking to switch to solar power. This tax credit is not valued at a set dollar amount, it is a percentage of the expense you incur to install a residential solar photovoltaic system. These tax credits help reduce the amount you owe in taxes. The federal government tax credit allows you to claim 26% of the total cost of solar installation on federal taxes and helps offset the initial cost of the solar system. The Solar Investment Tax Credit has been one of the most successful incentives in promoting the development of solar energy in the United States. There is no maximum amount that you can claim.

How Does the Federal Solar Tax Credit Work ?


You can claim ITC if you are a United States homeowner and the solar panel system installed is for a residential location in the US. The tax credit rolls over from year to year if the taxes you pay are less than the credit you earned. If you sign a Power Purchase Agreement (PPA) or lease with a solar installer, you cannot claim the tax credit. There is no income limit on this credit program, so taxpayers of all income groups may be eligible.

For example, if a solar system is installed for $23,000, the 26% tax credit saves $5,980 on your federal tax return for the same year.

You will claim the credit on your 2022 tax filing, if you install and start using a residential solar system during the year 2022. If you begin solar panel installation in December of 2022 but you do not turn the system by January 2023, you will claim the credit on the 2023 filing.

Who is Eligible for Federal Solar Tax Credit ?


You may be eligible for Solar Tax Credit if you meet all the following criteria :
  • Solar photovoltaic (PV) systems must have been installed between 1 January 2006 to 31 December 2023.
  • The solar PV system must be installed at your primary or secondary residence in the United States.
  • You are the owner of Solar PV System which means you have financed with Solar PV System Loan or bought it outright and you have not signed PPA or Lease.
  • The IRS allows a taxpayer to claim the Section 25D tax credit for purchasing a portion of a community solar project.
  • The credit can be claimed only on the original installation of the solar equipment if the solar PV system is new or being used for the first time. If you have purchased a home with a pre-installed solar system, you will not be eligible for the credit.

What Does the Solar Tax Credit Cover ?


Homeowners taking advantage of the 26 percent Solar Investment Tax Credit (ITC) can plan to cover the following :
  • Cost of solar panels
  • Labor costs include basic installation, on-site preparation or assembling. These include inspection costs, permit fees and developer fees.
  • The credit covers other components of the solar system, such as balance-of-system equipment, including inverters, wiring, and mounting equipment.
  • Sales taxes paid for qualified solar installation expenses.
  • Energy storage devices that operate exclusively through solar panels, including solar batteries.

How Much is the Federal Solar Tax Credit ?


For 2022, the solar tax credit will deduct 26% of the cost of a system for eligible commercial and residential tax payers. In the year 2023, this credit allows residential and commercial solar customers to deduct 22% of the cost of the system from their taxes.

When and For How Long Can Claim Solar Tax Credit ?


If you are eligible for the Federal Solar Tax Credit, but you owe no taxes during the given calendar year, the IRS will not return you with a check to claim the credit. 26% Solar Tax Credit is not refundable. ITC can be carried forward for five years (as per Section 48 of the Internal Revenue Code). So, if you have tax liability next year, but no tax this year, you can still claim the credit.

How to Claim the Federal Solar Tax Credit ?


Solar tax incentives are claimed with the IRS as part of your annual federal tax return. Contact your solar provider for proper instructions and documentation on how to claim ITC as part of your installation. Below we have listed the important steps in the credit claim process :
  • Download IRS Form 5695 as part of your tax return.
  • Calculate the credit on Part I of the tax form. You enter your solar system as a qualified solar power asset cost. On line 1, enter your overall project cost as written in your solar contract, then complete the calculation on lines 6a and 6b.
  • If solar is the only renewable energy addition and there is no rollover credit from the previous year, go to line 13 below.
  • On line 14, calculate any tax liability limits using the Internal Revenue Service's Residential Energy Efficient Property Credit Limit worksheet. Then, complete the calculations on lines 15 and 16.
  • Be sure to enter the figure from line 15 on your Schedule 3 (Form 1040), line 5.

To make sure you're claiming federal solar tax correctly, consult with a tax expert as well as your solar provider. Tax credits cover the taxes you paid on your return. Your credit will increase year after year, if the taxes you pay are less than the credit you earn. Enter your zip code on the Database of State Incentives for Renewables & Efficiency to see what other exemptions and state tax credits you can get.

How Long is the Solar Tax Credit Available ?


The Solar Tax Credit, which has been a growth driver for the solar industry, is in its final stages. The table below shows what is currently being planned for the future of the federal solar tax credit :

Year Placed In Service

Federal Solar Tax Credit

2021

26%

2022

26%

2023

22%

2024

10% (for commercial installations only)


Contact for More Questions


IRS is located at 1111 Constitution Avenue, N.W., Washington, DC 20224 and call (800) 829-1040.

U.S. Solar Tax Credit FAQ's


Is Solar Tax Credit a one-time credit ?
Federal residential solar energy credit is a one-time credit. But, if you cannot use it when you file, you can take the additional credit for the next year.
For example, if you owed $5,000 in taxes but received a $5,200 solar tax credit, you would pay $0 in taxes for the year you claimed it. Then, you'll need to deduct the next year's taxes by less than the remaining $200.

Can I use Solar Tax Credit against Alternate Minimum Tax ?
Yes, the tax credit can be used against either the Alternative Minimum Tax Credit or federal income tax.

If Solar Tax Credit exceeds my tax liability? Will I get refund ?
This is a non-refundable tax credit, which means you will not get a tax refund for the amount of the Solar Tax Credit but you can carry over any unused amount of the Solar Tax Credit to the next tax year.

How do I claim for Solar Tax Credit ?
All you need to do is file Tax Form 5695 with your tax return.

Is there an income limit for the Solar Tax Credit ?
There is no income limit on this credit.

Can I claim Solar Tax Credit if I am not a Homeowner ?
If you are not a homeowner, you can claim this credit only under specific circumstances, such as being a tenant-stockholder in a cooperative housing corporation or a member of a condominium complex.

Can I claim Solar Investment Tax Credit (ITC) if I am not connected to the grid ?
You do not need to be connected to the grid to claim this credit, this means that off-grid solar homes are eligible and in most cases, solar RV homes are also eligible.

If the solar panels are installed on the ground on my property, can I claim the credit ?
Yes, your solar panel need not be installed on your roof to claim solar tax credit. Ground-mounted solar panels may also qualify.

Can I Claim the Federal Solar Tax Credit Twice ?
If you own a house, you cannot claim this tax credit twice. If you have more than one solar powered home, you may be eligible. You should consult a tax expert to determine if you can avail it twice.

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