solar tax credit form 5695

Qualifying for the Federal Solar Tax Credit

Current Tax Credit
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What's the Federal Solar Tax Credit?

The Federal Solar Tax Credit, also known as the Investment Tax Credit or ITC, provides a dollar-for-dollar reduction from the government for solar installations. Both large-scale solar projects and residential solar alike can leverage this incentive.

As of 2021, the tax credit covers 26 percent. This credit, however, has an expiration date.

Knowledge of the federal solar tax credit, and how to take advantage of it, can save customers on their electricity. One of the first things to understand about the ITC is that it's a tax credit, not a rebate.

Tax Credit Versus Rebate

A rebate is a fixed amount of money sent to the customer after they have purchased the product. While recipients receive the tax credit after their solar array installation, it isn't always in a lump sum.

The amount the customer receives depends on federal taxes owed. If they don't owe the full tax credit, it carries over and applies to the following year's taxes until it is completely used.

Solar Tax Credit FAQs

Tax Credit Eligibility

To qualify for the ITC, the individual needs to purchase the solar array so they own it. Qualified solar installations should go on the owner's primary or secondary residence.

The homeowner also needs to be the first owner of that specific solar array. Qualifying community solar projects can't exceed typical consumption.

Can I Qualify for the ITC Without a Job?

While most working homeowners qualify for the ITC, some retired individuals also qualify. To qualify, the person purchasing the solar array needs taxable income, which encompasses more than one may expect.

A current job includes one form of taxable income. However, it isn't the only kind — investments, and certain retirement funds, can also qualify a homeowner for the ITC.

The amount of savings you earn from the credit does not hinge on the amount of your taxable income. It's determined by whether you have taxable income and the size of your solar array.

How the Tax Credit Pays Solar Loans

To help make solar affordable, many solar loan companies offer "balloon" payment plans. These plans have low monthly payments throughout the loan with a balloon payment equivalent to the ITC at the end of the first 12-18 months.

Once the individual receives the tax credit, this money pays off the balloon fee. Individuals who want to use this money for other purposes can opt-in for higher payments throughout the loan instead.

Savings From the ITC

As of 2021, the ITC saves homeowners up to 26 percent of their installation costs. These include the labor, permitting, and equipment fees associated with solar installations.

Timeline of the Federal Solar Tax Credit

While the federal solar tax credit currently sits at 26 percent, it will phase down after 2023, making investing in solar soon ideal. By 2023, it will decrease to 21 percent.

 

After 2023, only business solar installations will qualify for the 10 percent tax credit. However, innovation and solar module efficiency may improve enough when the tax credit phases out to recoup some of the loss on the tax credit's potential savings.

Countdown Until the Next ITC Phase Down: January 1, 2023

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What You Can Claim in the Federal Tax Credit

Those applying for the federal tax credit can claim the permitting, installation, equipment fees and taxes associated with the solar array. They can also claim energy storage, such as the Tesla Powerwall, as long as the battery charges exclusively by the solar array. 

Filing the Tax Credit

To file for the ITC, the owner of the system needs to fill out and attach the IRS Form 5695 to their federal tax return. This form is also available on online tax sites. 

Can You Claim the Solar Tax Credit Twice?

Owners can only claim the solar tax credit once on the same solar array. However, additions or new systems by the same owner can qualify for separate solar tax credits. That said, it's best to talk to a tax professional first.

How the Federal Tax Credit Works for Leased Solar Panels

Only those who own the solar array can claim the federal tax credit for it. While the individual leasing solar can't claim the tax credit, the solar company leasing the solar panels to the customer can. Missing out on this tax credit is one of the many reasons why buying solar is better than leasing it.

What You Need for Potential Solar Tax Credit IRS Audits

Remember to keep a copy of the IRS Form 5695. Having a filed hard copy or digital format of this form will make any IRS audits easy, should they occur.

How Other Incentives Affect the Federal Tax Credit

Some incentives impact the percentage of the ITC that the homeowner can claim. Customers who know how these incentives work together can better determine which incentives to apply to their solar array.

Electric Utility Solar Rebates

Income taxes often exclude utility rebates. When this is the case, these subsidies decrease the cost of the array before applying the ITC.

Renewable Energy Credits and the Solar Tax Credit

Many states have solar incentives through the state's renewable energy credit trading program. Individuals who receive payment for their solar array's renewable energy credits do not have to worry about this impacting their solar tax credit.

Influence of State Incentives

Many states offer rebates or tax credits for residential solar installations. These state-funded incentives don't impact the federal solar tax credit.

MACRS: Its Impact on the ITC

Individuals who have a home-run business can use MACRS to offset the cost of their residential solar installation. Those who choose to use this business depreciation program are required to reduce their ITC incentive by 50 percent. 

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