How to File the Federal Solar Tax Credit – A Step by Step Guide
Now that you have your very own solar system, the 30% Residential Solar Tax Credit is yours for the claiming. How exactly do you go about it?
In this post, we’ll walk you through the basics of how to file for the federal solar tax credit. If you’re a do-it-yourselfer who knows your way around a tax form (or if you’re just curious), this guide will get you going in the right direction.
This article does not constitute tax advice. Consult a licensed tax professional regarding your situation.
What Do I Need to File for the Federal Solar Tax Credit?
The Residential Clean Energy Credit (also known as the solar investment tax credit or ITC) is a tax credit for homeowners who invest in solar and/or battery storage. Thanks to the Inflation Reduction Act, the 30% credit is available for homeowners that install solar from 2022 to 2032. That’s 30% of the gross amount paid for the system and its installation.
You will need four IRS tax forms to file for your solar tax credit:
- Form 1040
- Schedule 3 (Form 1040)
- Form 5695
- Instructions for Form 5695 (latest version)
You’ll also need:
- Receipts from your solar installation
- A calculator
- A pencil
Form 1040 is the standard federal income tax form. But this year, you get to fill in a few extra boxes to reduce your tax bill 🙂
How to Calculate Your Solar Tax Credit
Calculating the amount of your federal solar tax credit is very simple. Take the total cost your system and multiply it by 0.30.
For example, if you spent $25,000 all-in on going solar (parts, labor, permits, etc), then your tax credit would be worth $7,500.
$25,000 (gross cost) x 0.30 (30% tax credit) = $7,500 Residential Clean Energy Credit
In order to receive this credit, you need to claim it on your taxes for the year the system was deemed operational by a government inspector. So if you got installed and got approved in 2022, then you would claim the federal solar tax credit on your 2022 taxes that you file in early 2023.
Now that you know how to calculate the credit amount, let’s look at how to file it.
How to File for the Federal Solar Tax Credit – Step-by-Step
Fill in Form 1040 as you normally would. When you get to line 5 of Schedule 3 (Form 1040), shown below, it’s time to switch to Form 5695.
Step 1: Calculate how much your solar tax credit is worth
- On Form 5695, enter the full amount you paid to have your solar system installed, in line 1. This includes costs associated with the materials and installation of your new solar system. See more detail about how to calculate it here. As an example, we’ll say $25,000.
- For this example, we’ll assume you only had solar installed on your home. Enter “0” for lines 2-5.
- Line 6a – Add up lines 1 through 5.
Example: 25,000 + 0 + 0 + 0 = 25,000
- Line 6b – Multiply the amount in line 5 by 30% (.30)
Example: 25,000 x .30 = 7,500
- Line 7a – Check “No.” Again, for this example, we’re assuming you didn’t have any other systems installed, just rooftop solar.
- Lines 7b, 8, 9, 10 and 11 – Don’t apply to you in this example for the same reason. You can fill each with 0 and skip down to line 12.
Step 2: Rollover any remaining credit from last year’s taxes
- Line 12 – If you filed for a solar tax credit last year and have a remainder you can roll over, enter it here. If this is your first year applying for the ITC, skip to line 13.
- Line 13 – Add up lines 6b, 11 and 12
Example: 7,500 + 0 + 0 = 7,500
Step 3: Find out if you have any limitations to your tax credit.
Line 14 – For this line, you’ll need to switch to the worksheet at the top of page 4 in the 5695 instructions.
- Worksheet Line 1 – Enter the total taxes you owe (you found this out earlier and entered it into line 18 on your 1040 form).
- Worksheet Line 2 — Enter other tax credits and adjustments you’re claiming
- Worksheet Line 3 — Subtract Line 2 from Line 1 to find your credit limit
Example: 10,000 – 0 = 10,000
In this example, your credit limit would be $10,000.
Step 4: Find out how much of the remainder (if any) you can roll over into your tax return next year
Almost done! Switch back to your Form 5695.
- Line 14 – Enter the number from line 3 of the worksheet.
- Line 15 – Enter the lesser number of line 13 or 14 (it depends on what your total tax bill is vs. your total tax credits).
- Line 16 – Find the difference between lines 15 and 13 to see if there’s any credit to carry forward for next year. In our example, it zeros out.
Example: 7,500 – 7,500 = 0
Learn more about rolling over the Residential Clean Energy Credit over here.
Step 5: Apply the amount found in Form 5695 to your tax bill on Form 1040
Now that you’ve calculated your solar tax credit amount, it’s time to transfer it to your 1040 to complete the process
- Write the amount from Form 5695 line 15 into line 5 of Schedule 3.
- Complete the rest of the Schedule 3 to get a total on Line 8.
- Enter the amount from Schedule 3 line 8 into Form 1040 line 20
You did it! Your solar tax credit is now claimed on your 1040 and can be used to reduce your tax liability.
Of course, this walked you through filing for a pure solar panel installation tax credit. If you had other solar or renewable systems installed, like a new geothermal or solar water heaters, there would be more incentives to add in.
Hopefully, this gave you a clear idea of the steps involved and it demystified the process. Read about more electrification incentives in the Inflation Reduction Act here.