How do I claim the solar tax credit (ITC)?

How to Claim the Solar Tax Credit EnergySage

If you’re considering solar, you’ve probably heard about the federal solar tax credit, also known as the Investment Tax Credit (ITC). The Federal ITC makes solar more affordable for homeowners and businesses by granting a dollar-for-dollar tax deduction equal to 30% of the total cost of a solar energy system.

What does 30% actually mean for the average solar shopper? According to EnergySage marketplace data, the average national gross cost of installing a solar panel system in the first half of 2015 was $29,225. At that price, the solar tax credit can reduce your federal tax burden by $8,768 – and that’s just one of many rebates and incentives that can reduce the cost of solar for homeowners.

There’s plenty of information out there about the value of the residential ITC, but figuring out how to actually claim the credit when it comes time to file your taxes is another story. We’ll walk you through the process step by step from Form 5695 to Form 1040.

The 3 steps to claim the solar tax credit

  1. Determine if you are eligible for the Federal ITC – make sure you credit for ownership and that federal tax liability are in order
  2. Complete IRS Form 5965 to validate your qualification for renewable energy credits
  3. Add your renewable energy credit information to your typical form 1040

First things first: am I eligible for the solar tax credit?

You are eligible for the Federal ITC as long as you own your solar energy system, rather than lease it. 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, although in some special cases a lease will grant you the financial benefits associated with the sale of solar renewable energy certificates (SRECs). 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.





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Here’s an example: You pay $25,000 to install a solar system on your home in 2015, which means you are eligible for a $7,500 federal solar tax credit. If your federal tax liability for 2015 is only $6,000, you will owe no federal taxes that year, and in 2016, you will reduce your tax liability by $1,500.

Take advantage of the solar ITC now – get an instant estimate of what solar can save you!

How do I fill out IRS Form 5695 for 2016?

Claiming the ITC is easy. All you need to do is complete IRS Form 5695, “Residential Energy Credits,” and include the final result of that form on IRS Form 1040.

Please note: At EnergySage, we are solar experts, not tax experts! Tax codes are complicated, so consult your tax advisor before deciding what is best for you.

How to complete Form 5695 

Form 5695 calculates tax credits for a variety of qualified residential energy improvements, including geothermal heat pumps, solar panels, solar water heating, small wind turbines, and fuel cells. We’ll use the national average gross cost of a solar energy system 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.

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  • On line 6, multiply line 5 by 30%. This is the amount of the solar tax credit.

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  • 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.

Now you need to calculate if you will have enough tax liability to get the full 30% 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, buying a home for the first time, 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.)

Energysage energy efficiency worksheet

  • 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.

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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).

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The steps above outline all you need to do to have 30% of the cost of your solar panel system credited back to you! If you did energy efficiency improvements to your home in the same year, you may also need to complete page 2 of Form 5695. Either way, be sure to include Form 5695 when you submit your taxes to the IRS.


Additional Solar Energy Resources





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58 thoughts on “How do I claim the solar tax credit (ITC)?

    1. Sara Matasci Post author

      Hi Brooke,
      The ITC is a tax credit, but it isn’t a refundable tax credit, which means that you can’t get more money back than you owe in taxes in one year. However, the solar tax credit does carry over if you can’t claim it all in one year. For example, if you have a $3,000 credit but only owe $2,000 in federal taxes in Year 1, you can apply the remaining $1,000 credit in Year 2.

      Reply
      1. Alex Huntington

        Not sure what type of loan you had David, and I’m sorry it didn’t work out for you. But you absolutely CAN apply the ITC to your loan if you do the right loan. Most lenders who finance solar (Mosaic, Greensky, Sunlight, etc.) give you a 12-18 month period to apply that ITC. If you pay that to your loan within that time period, the loan re-amortizes to a lower payment. If you don’t apply it, then it just goes to the normal payment you’d have with any other type of loan that doesn’t re-amortize.

        Reply
        1. Tom Smith

          Alex,

          Exactly how do you apply the credit to the loan? I have a Green Sky loan, but I am not sure how to apply the credit if is not a refundable (monetary) credit.

          I was told (by the salesman) that once I get the credit I should apply it to the loan, he implied multiple times that it would be actual money refunded that I could apply to our Green Sky loan before the 18month period ended.

          Reply
  1. Steve

    Can anyone help me find the appropriate tax forms for the Connecticut solar incentive rebate? I have been searching with no real results. There is information everywhere about the incentive and how it works but nowhere can I find how to apply instructions? Turbotax applied the credit to my federal return but nothing on the state return. Thanks.

    Reply
  2. sophia

    i have a question
    if i am employeed by a company and i am paying taxes monthly .. obviously by the end of the Year i do not owe the IRS correct?
    so than i can not claim the 30% tax credit?

    Reply
    1. Alex Huntington

      You should be able to claim it. You pay monthly on your annual tax liability, so you’re still paying taxes. Unless you get everything back at the end of the year, you should get the ITC.

      Reply
  3. Deborah Stewart

    You are withholding taxes from your paycheck close to what you owe at the end of year. If you owe 2000.0O in taxes and if using your credit makes your tax liability zero any amount withheld as estimated taxes will be issued as a refund. The following year you can change your withholding and get more in your paycheck while carrying forward any balance not used. Just remember to change your withholding back when the credit is used up.

    Reply
  4. Alex A

    Quick question. If I purchase solar panels in 2016 for a home that is my primary residence in 2016 but end up renting the home in 2017 can I still claim the 30% tax credit?

    Reply
    1. Sean Thiel

      Yes, homeowners take advantage of financed loans with no upfront cost which allows them to pay off loan with monthly payments lower than pre-solar utility bills. Financers like Dividend, Mosaic, Sunlight all provide these types of no money down offers that allow homeowners to let renters pay off the system costs while increasing equity in that home.

      Reply
  5. Kyle C

    Does replacement batteries on an off grid system qualify? What about the back up propane generator as a part of the system as a whole?

    Reply
    1. Keith

      Does anyone know the answer to Kyle’s question? I too am facing having to replace batteries in my PV solar system.

      Reply
      1. Sean Thiel

        Off grid systems will not qualify for ITC. However, CA has the Self Generation Incentive Program that also provides rebates for battery storage projects. But only grid-tied systems will qualify for these programs.

        Reply
  6. Jordan

    So what happens when I get a refund every year.
    I always over pay so for example

    They withheld: 5,000
    Used: 4,000
    Tax return = 1,000

    If I have a credit of 6,000 in solar, then do I get all of the 5,000 that was withheld back as a refund? Or does it mean I am not a good candidate for the tax incentive?

    Reply
      1. Alicia

        Kat,
        I don’t think anyone answered Jordan’s question. I am in a similar situation so if you or someone else knows how that would work please chime in! Any information would be helpful.
        Thanks!

        Reply
    1. Clint

      It is not a refundable tax credit meaning it will only cover your tax liability at the end of the year. The best way to take advantage of the credit is to change your federal withholdings so you owe money at the end of the year and use your tax credit to pay for this shortfall. It is best advised, however, to talk to your accountant or a tax professional.

      Reply
      1. Paul

        I don’t think so. Income tax liability refers to the total amount of tax you owe for the given year before taking the amount withheld into account.

        Reply
    2. David Carson

      Take and file exempt. You won’t get a refund but you’ll get it back with each paycheque. That’s what I’ve had to do.

      Reply
  7. Tom Hallford

    Hello:

    Must the purchaser of the system OWN the home on which the system is installed in order to claim the tax credit? What if my parents, who live in my home but are not on the title or mortgage, purchase the system? Would they get the ITC?

    Reply
  8. Amanda Perez

    If I purchased solar and upon the purchase of our new home requested that the seller pay half of the solar. Do I enter the total amount of the solar on the tax form or just the portion I paid?

    Reply
  9. Bon Bon

    I think it would be wise to mention in this article that ITC is also exempt from AMT. Something most people don’t know about.

    Reply
  10. Hal Kaplan

    This article states:
    “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.”
    In addition, a Dept. of Energy website (http://energy.gov/savings/residential-renewable-enegry-tax-credit) states:
    “The home served by the system does not have to be the taxpayer’s principal residence.”
    However, IRS Form 5695 line 17a asks if the improvements were for your main home. If you answer “No” you can’t claim the credit.
    How can I claim the credit for a second (vacation) home?

    Reply
    1. Hal Kaplan

      I think I’ve answered my own question (with the help of my PhD daughter). There are two types of tax credits handled on Form 5695: The Residential Energy Efficient Property Credit (reported in Part I) and the Nonbusiness Energy Property Credit (reported in Part II). If you’re only claiming the former, you only fill out Part I and stop at line 15 (or 16 if there’s a carryover). Therefore, you never get to the more restrictive test in Part II which has the main home test on line 17a. This conclusion is further supported by the instructions for form 5695 which clearly states for Part I that “The home doesn’t have to be your main home.” Case closed.

      Reply
  11. Alfredo Garcia

    I am a disabled Veteran 100% but I learned that only my retirement pay can only be taxed. I don’t think I will be eligible to receive 7,000 dollars.
    I did get the loan for 16,000 but not the 23,000 thousand. I did write to the person about this maybe I’ll get it the 23,000 loan and maybe I won’t.
    Do you know any disabled veterans like my position? That did or did not get the tax breaks?

    Reply
  12. Virginia Barnum

    All I get is social security. I pay no taxes. I have the solar panels already installed. The salesman in formed us of a government refund. How do I file this?

    Reply
  13. Dave Thompson

    I was offered used solar modules that had been in service for 3 years. Does the fact they are used solar modules compromise my ability to earn the tax credit?

    Reply
  14. Tammy L. Drake

    My parents are retired and had some solar panels put in and were told by the installers that they could deduct them from there taxes. However, since they didn’t earn any income for the year they were told they couldn’t deduct them. This deduction was an incentive used by the solar panel company, Needless to say, my parents are very upset about this.

    Reply
    1. TaxMan

      It’s great that your parents have solar, but I’m sorry they were misled Whenever someone says anything about tax savings to you, ask your accountant. If you don’t have an accountant, ask a family member’s accountant. If you’re all doing your own taxes, you’re most likely paying more tax than you need to. Most of the time when people come to me to ‘check’ the tax returns they did themselves, I can amend the last 3 years they did themselves and correct mistakes/things they overlooked, and get them nice refunds.

      PS, Solar credit should be available thru 2019… but check with your accountant first because tax laws are always changing! … and don’t rely on some internet article that was written by someone who read something but misunderstood it. I see that all the time.

      Reply
  15. Bob Ganzelli

    We just put on a new roof with a thermal heat barrier and two solar attic fans. Is the cost eligible for the 30% tax credit on the solar fans?

    Reply
    1. Laurel

      Solar attic fans are not part of the ITC. If there are rebates for them that is different. The ITC is specifically for renewable energy generation.

      Reply
  16. Eddie Ng

    Our situation might be a bit unique and tricky.

    We own two houses in the New York State. My wife claimed one of them as her primary residence while I claimed the other as my primary residence. It is the house that I claimed primary that we want to install solar and our ownership of this house is 50-50.

    I just asked my accountant whether we are eligible to get the 30% tax credit, however, she wasn’t able to answer because we own two homes and each of us claimed a separate primary residence.

    Would anyone be able to advise?

    Thanks

    Reply
  17. nathalie flautat

    Is anyone knows if the residential energy credit, in this case, Solar system, will be carry on for 2017?

    Reply
  18. Celine chu

    I’m buying a house with solar lease which started in August 2015. If I chose buyout, can I get the tax credit?

    Reply
  19. Rich Garella

    Again on the topic of ““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.”
    The article also states “If you sign a lease agreement, the third-party owner gets the solar tax credit associated with the system.”
    How is it possible that a third-party leaser can get the tax credit for putting their system on a property that they don’t own at all? And if they can, why can’t *anyone* get a tax credit for putting a system on any residential property whether they own it or not (obviously, with the owner’s permission)?

    Reply
  20. Tom

    Are certifications still required from solar panel manufacturers that their panels meet all qualifications to be eligible for the ITC?

    Reply
  21. Tony Lamberti

    I am planning to buy a “Goal Zero” which is a large lithium ion battery with 8 solar panels. It will not be installed but used as a back-up during emergencies or power outages. Total cost over $3000. Am I eligible for Federal Tax rebate?

    Reply
  22. Steve

    I need a new roof. In order to put the solar on my roof the roof needs to be replaced. A truss or two needs to be fixed etc. Is this considered part of the Qualified solar electric property costs – or would it be under the Qualified energy efficiency improvements (assuming I put energy qualifying shingles etc) Or both? Would this work be considered part of the build?

    Reply
  23. Tom Lin

    Regarding “The federal solar tax credit, also known as the investment tax credit (ITC), allows you to deduct 30 percent of the cost of installing a solar energy system from your federal taxes. The ITC applies to both residential and commercial systems, and there is no cap on its value. Thanks to the ITC, the average EnergySage Solar Marketplace shopper saved over $5,000 on the cost of going solar in 2017.”

    We are anticipating a solar installation on our office building which is rented out to multiple tenants. Would this be considered a “commercial systems” stated in the above paragraph? All of the forms you mentioned are for “residential systems”. And since rental residential systems do not qualify why would a rental office building qualify?
    Clarification regarding ITC for commercial solar systems installed on office buildings / warehouse / retail buildings will be very much appreciated…

    Reply
  24. Tom Lin

    So far, IRS direct sources identify “Commercial ITC” as a tax credit for solar equipment manufacturers and not for owners of commercial buildings installing solar equipment. If so, is it correct to conclude that all solar installation for commercial buildings such as office, warehouse and retail buildings do not qualify for ITC?
    Thanks

    Reply
  25. James L

    Is it possible to carry the unused portion of the credit over to more than one additional year? For example, if I earn a credit of $5,000 and can only claim $2,000 the first year and $2,000 the next year, can I claim the remaining $1,000 on the following year? Thanks.

    Reply
  26. Rudy Raborn

    If a business claims a tax credit for solar panels, does it have to deduct the credit from the cost of the panels for depreciation purposes?

    Reply
  27. John Mearns

    I’m off the grid, and have been for 30 + years. My system is outdated. I want to install new solar panels and use newer slightly used inverters that were gifted to me from a job we worked on. I’m a general contractor. Am I still eligible for a 30% tax credit for costs associated with my upgrade even though I have never been connected to the grid?

    Reply

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