You are eligible for the Federal ITC as long as you own your solar energy system. If you sign a lease agreement, the third-party owner gets the solar tax credit associated with the system. This is also true for the vast majority of state and local incentives for solar. You are also eligible even if the solar energy system is not on your primary residence – as long as you own the property and live in it for part of the year, you can claim the solar tax credit.
If your federal tax liability is lower than the total amount of your ITC savings, you can still take advantage of it by carrying over any remaining credits to the following year.
Here’s an example: You pay $27,000 to install a solar system on your home in 2020, which means you are eligible for a $7,020 federal solar tax credit. If your federal tax liability for 2020 is only $4,500, you will owe no federal taxes that year, and in 2021, you will reduce your tax liability by $2,520.
What Does the 26% Mean For You
The federal solar tax credit, also known as the Investment Tax Credit (ITC) makes solar more affordable for you as a homeowner and businesses alike. By granting a dollar-for-dollar tax deduction equal to 26% of the total cost of a solar energy system. This incentive was 30% in previous years, and will drop to 22% in January 2021, and 0% in 2022.
What does 26% actually mean for you? According to Westhaven Power data, the average cost of a powerful solar panel system in 2020 is $27,000. At that price, the solar tax credit can reduce your federal tax burden by $7,020 – and that’s just one of many rebates and incentives that can reduce the cost of solar and batteries for homeowners.
- Claiming the federal ITC involves determining your tax appetite and filling out the proper forms
- The federal ITC steps down to 22% at the end of 2020, and goes away after 2021
- Book online an appointment to discuss your options and maximize savings
How to Claim
There are three broad steps you’ll need to take in order to benefit from the federal solar tax credit:
Complete IRS Form 5695, “Residential Energy Credits,” and include the final result of that form on IRS Form 1040, in addition to your regular tax form
This form validates your qualification for renewable energy credits. Of note, we’re solar utility power experts at Westhaven Power, so we’d recommend to consult with your tax preparer first.
Form 5695 calculates tax credits for a variety of qualified residential energy improvements. For the purpose of this demonstration, we'll use the numbers below as an example.
- First, you will need to know the qualified solar electric property costs. That is the total gross cost of your solar energy system after any cash rebates. Add that to line 1.
- Insert the total cost of any additional energy improvements, if any, on lines 2 through 4, and add them up on line 5.
- On line 6, multiply line 5 by 26%. This is the amount of the solar tax credit.
- Assuming you are not also receiving a tax credit for fuel cells installed on your property, and you aren’t carrying forward any credits from last year, put the value from line 6 on line 13. Then calculate if you will have enough tax liability to get the full 26% credit in one year.
- Complete the worksheet on page 4 of the instructions for Form 5695 to calculate the limit on tax credits you can claim. If you are claiming tax credits for adoption expenses, interest on a mortgage, or buying a plug-in hybrid or electric vehicle, you will need that information here. (For this example, total federal tax liability is $7,000.)
- Enter the result on line 14 of Form 5695. Review line 13 and line 14, and put the smaller of the two values on line 15.
- If your tax liability is smaller than your tax credits, subtract line 15 from line 13, and enter it on line 16. That’s the amount you can claim on next year’s taxes.
Add credit to Form 1040. The value on line 15 is the amount that will be credited on your taxes this year. Enter that value into Form 1040, line 53 (or Form 1040NR, line 50).
If you continue to upgrade your home with energy efficiency improvements in the same year, please complete page 2 of Form 5695, as appropriate.
Happy tax credit season!