Anyone else find filing taxes, well, taxing? You already know about the amazing tax benefits when you go solar, but now it’s time for you to file your taxes and you have no earthly idea of what you’re doing. Fear not, we’ve put together a step-by-step guide on how to claim your federal ITC (Investment Tax Credit).
There are three major things you’ll need to do in order to benefit from the federal tax credit:
1. Determine whether or not you are eligible
You qualify for the Federal ITC so long as you own your system rather than lease it. If you signed a lease agreement, the third-party owner will get the solar tax credits associated with your system instead of you. Bear in mind that it is a tax credit and not a tax refund, so you can’t get more back in a single year than you owe in federal taxes. In the event that your federal tax liability is lower than your total amount of ITC savings, you can carry over the remaining credit to the following year.
2. Complete IRS Form 5695
This form, which can be obtained online, is validation of your qualification for renewable energy credits. Form 5695 encompasses tax credits from a plethora of residential energy improvements such as solar panels, solar water heating, geothermal heat pumps, fuel cells and small wind turbines. To complete the form, you will need to know the gross total cost of your solar system after any cash rebates you may have received. That value goes on line 1. Next, if you have any additional energy improvements, you’ll list their gross total costs on lines 2, 3 and 4. Add up lines 1-4 to get the value for the line 5. On line 6, multiply the number on line 5 by the amount of the solar tax credit (currently 26%). Afterwards, you’ll need to calculate if you will have enough tax liability to get the full 26% credit in one year. Do this by filling out page 4 of the Instructions for Form 5695. You will need information for any tax credits you plan to claim relating to adoption expenses, interest on a mortgage and/or a plug-in hybrid or electric automobile to complete this page. Put the result on line 14 of Form 5695. Looking at lines 13 and 14, put the smaller of the two on line 15. Should your tax liability be lower than your tax credits, subtract line 15 from line 13 and enter the result on line 16. You will be able to claim that amount on next year’s taxes.
NOTE: IRS Form 5695 is published on the IRS website early to mid January each year. For example, if you go solar in 2021 and are claiming tax credits for that year, Form 5695 will not be available to print until sometime in January of 2022.
3. Add your renewable energy credit information to your typical form 1040
Finally, be sure to add the value on line 15 on line 5 of Schedule 3 (Form 1040 or 1040-SR) or to line50 on Form 1040NR.
That’s it! That’s all you need to confirm and file to receive your Federal ITC. If you made energy efficiency improvements to your home in the same year that you’re filing for, it is possible that you will need to fill out page 2 of Form 5695. Regardless, be certain to submit Form 5695 whenever you submit all your other tax information to the IRS.