form 5695 instructions solar tax credit

How do I claim the solar tax credit (ITC)? Form 5695 instructions

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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 26% of the total cost of a solar energy system.


What does 26% actually mean for the average solar shopper? According to EnergySage marketplace data, the average national gross cost of installing a solar panel system in 2021 is $16,860. At that price, the solar tax credit can reduce your federal tax burden by $4,618 – 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 instructions step by step from Form 5695 to Schedule 3/Form 1040.

Key takeaways


  • Claiming the federal ITC involves determining your tax appetite and filling out the proper forms
  • The federal ITC remains at 26% for 2021 and 2022
  • Start comparing solar quotes on the EnergySage Marketplace for maximum savings

Form 5695 instructions: the 3 steps to claim the solar tax credit

There are three broad steps you’ll need to take in order to benefit from the federal solar tax credit:

  1. Determine if you are eligible

    Make sure you have enough tax appetite to use the federal ITC against your total taxes.ITC three scenarios

  2. Complete IRS Form 5695

    This form validates your qualification for renewable energy credits, and can be obtained online.

  3. Add your renewable energy credit information to your typical Form 1040

    Loop your renewable energy credit information into your regular tax form.

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.

Here’s an example: You pay $20,000 to install a solar system on your home in 2021, which means you are eligible for a $5,200 federal solar tax credit. If your federal tax liability for 2021 is only $4,500, you will owe no federal taxes that year, and in 2022, you will reduce your tax liability by $700.

Instructions for filling out IRS Form 5695 for 2021

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 Schedule 3/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.

Form 5695 instructions

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.
form 5695 instructions
  • On line 6, multiply line 5 by 26%. This is the amount of the solar tax credit.
form 5695 instructions
Note: this is from the 2019 form when the ITC was still 30%.
  • 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 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.)
form 5695 line 14
  • 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.
form 5695 instructions

Add credit to Schedule 3/Form 1040

The value on line 15 is the amount that will be credited on your taxes this year. Enter that value into Schedule 3 (Form 1040 or 1040-SR), line 5, or Form 1040NR, line 50.

form 5695 final step

The steps above outline all you need to do to have 26% 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.


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281 thoughts on “How do I claim the solar tax credit (ITC)? Form 5695 instructions

  1. Sean

    I just had my taxes done and I don’t understand why my credit only worked out to roughly 13%. I had all sorts of deductions (mortgage interest, child tax credits, etc.) But my tax preparer didn’t mention anything being available to carry over for next year. Anyone have a clue?

    Reply
  2. jana moseley

    I cannot find any information anywhere on this subject: What happens to my remaining Federal Solar Tax Credits if I sell my home before claiming them. Do I need to recapture? This is for a residential installation. I figure I have a couple years left of credit to use up. Thanks for helping!

    Reply
  3. Dare Rucker

    If you don’t have any taxes taken out because I get social security and VA military disability. And don’t make enough to do taxes. Can I still get rebate?

    Reply
  4. Mike Schnurer

    I pieced mealed my solar together so what can I claim is it everything to make my solar operational even the building I built to hold the electronic?

    Reply
  5. Bruce Smith

    I live in a continuing care facility in a separate cottage. I do not own the cottage, but paid the cost of it to be built. I would like to put solar panels on our cottage and the community has agreed (they “own” the cottage. Can I get a Federal tax rebate? What do I do to get the rebate?

    Reply
  6. Brandon

    I usually get enough withheld in federal income tax each year to get a refund. If my tax liability is lower than the tax credit, I’m still not sure how this is a benefit to me since it’s a credit and not a refund. Should I pay less federal income tax next year to take advantage of the rollover credit?

    Reply
    1. Dan

      Hi Brandon, I recently installed a solar system and I had to carry over a portion of my solar refund to this year. We must make sure we’re talking about the same thing when we say ‘tax liability.’ For example, just because you are already getting a refund doesn’t mean you still have no tax liability. It just means you paid a little bit more than you needed to over the course of the year, probably through your employer witholding.

      But your ‘tax liability’ as far as solar is concerned is the total amount that was owed based on your income.

      Example:
      Suppose your taxable income in 2020 comes out to $70,000. And suppose from there that your tax owed is $10,000, and $11,000 was withheld by your employer, meaning you already ‘paid’ it.

      So in that scenario, you would normally get a $1000 refund.

      The solar credit applies to the $10,000 owed. So, if you ended up with a $6500 solar tax credit, you would get $7500 back ($6500 + $1000), because you still paid the remaining $2500 owed out of the $10k.

      If your solar credit was $12,000, you would have to carry over $3000 to the following year (because you were already owed $1000 back, so $9k more from the solar credit = $10k credited for this year, and leaves 3k to go).

      Make sense?

      Of course it’s always a little more complicated than this and I recommend using a tax accountant this year even if you normally file them yourself, just to make sure everything is done right, but that’s the basic idea.

      Reply
    2. Champ

      you’re tax liability is what you owe in taxes after deductions etc. your withholding tax is just a placeholder amount the gov takes from your paycheck each month to ENSURE they get paid. Imagine if they didn’t do that, almost every American would spend to zero and have a multi-thousand dollar tax bill due in April…I digress. BL: don’t confuse withholding tax amounts with tax liability; they’re connected but not the same.
      this solar credit goes directly against your tax liability. First ex, no solar tax credit: If you withheld (ie “prepaid”) $10,000 in taxes over the tax year, but your tax liability (taxes you actually owe which are calculated after you file) was $8,000, you get a $2,000 IRS refund check. Second ex, with a solar tax credit: You buy (not lease!) a solar system for $10,000. 26% of the cost of that system is $2,600, this is your credit. You withhold $10,000. You’re actual taxes are $8,000. but wait, you have a $2,600 credit against your tax liability. 8-2.6 = $5,400 taxes due. You withheld $10,000, so you’re IRS refund is now $10,000-$5,400 = $4,600. You win.

      Reply

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