Having acquired your personal solar system, you are now eligible to claim the 30% Residential Solar Tax Credit. But how exactly can you go about it? If you have made energy-saving improvements (Solar) to your home in the United States during the year, you may be eligible to claim the credits. To claim this credit, you must include it in your tax return for the year when the solar system was approved by a government inspector and deemed operational. If your installation and approval took place in 2023, you would file for the federal solar tax credit in your 2023 tax return, which is typically submitted in early 2024.
Determining the value of your federal solar tax credit is a straightforward process. Simply multiply the total cost of your solar system by 0.30.
For instance, if you invested $30,000 in your solar project, encompassing all expenses such as materials, labor, and permits, your tax credit would amount to $9,000.
Gross cost x 30% tax credit = Residential Clean Energy Credit
Now that you are familiar with the process of calculating the credit amount, let's explore how to properly file for it.
To claim your solar tax credit, you will be required to obtain four IRS tax forms:
1. Form 1040
3. Form 5695
Please ensure that you have all these forms ready when filing for your solar tax credit.
Form 1040 is the standard federal income tax form. But this year, you get to fill in a few more boxes to reduce your tax bill. You would fill this form out as you normally would
Step 1: Determine the value of your solar tax credit
On Form 5695, input the total amount you paid for the installation of your solar system on line 1. This includes both the costs of materials and the installation itself. Let's use $30,000 as an example.
In this scenario, let's assume that you only had solar installed on your home. Therefore, enter "0" for lines 2-5.
Line 6a – Add up the amounts from lines 1 through 5.
Example: 30,000 + 0 + 0 + 0 = 30,000
Line 6b – Multiply the amount from line 5 by 30% (.30)
Example: 30,000 x .30 = 9,000
Line 7a – Check the box for "No." Once again, for this example, we're assuming that you only had rooftop solar installed and no other systems.
Lines 7b, 8, 9, 10, and 11 – These lines do not apply to you in this example for the same reason stated above. You can enter "0" for each of them and proceed to line 12.
Step 2: Carry over any remaining credit from the previous year's taxes
Line 12 – If you claimed a solar tax credit last year and have any remaining credit that can be carried over, enter it here. If this is your first year applying for the Investment Tax Credit (ITC), skip to line 13.
Line 13 – Add up the amounts from lines 6b, 11, and 12.
Example: 9,000 + 0 + 0 = 9,000
Step 3: Determine if there are any limitations to your tax credit
Line 14 – For this line, you will need to refer to the worksheet on the top of page 4 in the 5695 instructions.
Worksheet Line 1 – Input the total amount of taxes you owe (which you previously entered on line 18 of your 1040 form).
Example: 15,000
Worksheet Line 2 – Enter any other tax credits and adjustments you are claiming.
Example: 0
Worksheet Line 3 – Subtract Line 2 from Line 1 to find your credit limit.
Example: 15,000 - 0 = 15,000
In this example, your credit limit would be 15,000
Step 4: Determine the amount of the remaining balance (if applicable) that can be carried forward to your tax return for the following year.
We're almost finished! Return to your Form 5695 now.
Line 14 - Input the figure from line 3 of the worksheet.
Example: 15,000
Line 15 - Enter the lower number between line 13 and 14 (depending on your total tax bill compared to your total tax credits).
Example: 9,000
Line 16 - Calculate the difference between lines 15 and 13 to determine if there is any credit to be carried forward to the next year. In our example, it results in zero.
Example: 9,000 - 9,000 = 0
Step 5: Utilize the amount determined in Form 5695 to offset your tax obligation on Form 1040.
After calculating the amount of your solar tax credit, proceed to transfer it to your 1040 in order to finalize the procedure.
Enter the figure from Form 5695 line 15 into line 5 of Schedule 3.
For instance: 9,000
Proceed to complete the remaining sections of Schedule 3 to obtain a total on Line 8.
Then, input the amount from Schedule 3 line 8 into Form 1040 line 20.
Congratulations! You have claimed your solar tax credit on your 1040 and can use it to lower your tax liability. Note: This guide is specific to filing for a tax credit for a pure solar panel installation. Additional incentives may apply if you have installed other solar or renewable systems. For questions in regard to the Federal Tax Credit it would be best to reach out to your financial advisor or any tax professional.
Sources of this blog are from Solar.com and www.irs.gov
Comments