You probably already know there’s no greater financial incentive to go solar than the 30% federal Investment Tax credit, but when it comes to claiming it on your taxes, it never hurts to have a refresher. We don’t want you to have any solar related stresses in your life, so we’ve put together this helpful example below to take at least some of your tax-related stress away before April 15.
Homeowners, solar companies, and industry advocates alike were given a big Christmas gift in 2015 when Congress approved the 2016 federal spending bill and extended the solar panel tax credit. The December 18 bill contained a 5-year solar tax credit extension, which makes solar more affordable for all Americans.
>> But hey – don’t forget: we’re solar installers and aren’t in the business of giving tax advice. You’ll pardon the obligatory disclaimer, but if you intend to claim the solar tax credit in your filing, be sure to consult with a tax advisor to assess the full impact it will have on your taxes. With that, let’s dive in shall we?
Solar Tax Credit Example
Suzy Q is finally looking forward to doing her taxes (to some degree) because she knows she’ll be able to subtract the solar tax credit from her tax liability. She proceeds to fill out her IRS Form 1040 just like she normally would, but she stops when she gets to Line 53 where it says “Residential Energy Credit. Attach form 5695.”
She then starts to fill out IRS Form 5695 with all of the financial information related to her solar power system. The important thing for Suzy Q to remember here is that she can only claim the solar tax credit from the ‘net system price’, that is – the purchase price minus all rebates, discounts, and other incentives. So let’s say her net system price is $20,000.
‘Qualified Solar Electric Property Costs’ basically is another way of saying labor, installation, and materials costs, so she’ll just fill in the $20,000 in box 1. Unless she’s also installed solar thermal or geothermal heat pumps, she’ll proceed to box 5 and fill it with the sum of boxes 1 through 4 ($20,000).
Box 6 is where Suzy calculates the amount the credit amount by multiplying 30% (0.30) by the $20,000. In this example, she would put $6,000 in box 6.
Since she’s not doing anything with fuel cells (and I imagine the majority of solar homeowners won’t be), Suzy can then skip all the way to box 12. Provided you don’t fully utilize the tax credit in one year, the IRS allows you to roll over the difference to the next year.
So for example, if Suzy only owed $3,500 in taxes the first year she had her system installed, but was eligible for the same $6,000 solar tax credit, she would claim $3,500 the first year and (provided she has enough in owed taxes) would claim the remaining $2,500 the following year. For this example, this is the first year Suzy is claiming the credit so box 12 will remain empty.
Here’s the tricky part: after she follows the instructions in box 13 and fills in $6,000 again, she then needs to determine her owed liability to fill in box 14. Essentially this section is asking for your tax liability from Form 1040 minus any other credits you might receive. So let’s say Suzy only owes $4,300 in taxes this year and has no other credits she wishes to claim. She would fill in $4,300 in box 14.
She would then take whichever is lower (box 13 or 14) and include that in line 15 as well as on line 53 of Form 1040 (where she started). Line 16 is where she would subtract line 15 from line 13 to determine how much credit she could then roll over to the following year.
And that’s all there is to it! Suzy will owe $0 in taxes this year and will still have $1,700 remaining to use as a credit on next year’s taxes!
In the next section, we’ll dive a little deeper into answering the frequently asked questions relating to the solar tax credit.