The solar tax credit, officially known as the Residential Clean Energy Credit, is a federal incentive that allows eligible homeowners to deduct up to 30% of the total cost of their solar energy system from their federal tax liability in the year of installation. This article will provide general information on eligibility, along with the necessary forms and documentation you’ll need to claim the tax credit.
Eligibility Requirements
Generally speaking, most people who purchase a solar panel system for their home can qualify for the Residential Clean Energy Credit. However, not everyone who uses solar may be eligible. To qualify for the Residential Clean Energy Credit, you must meet the following criteria:
You must own your solar panel system. Only individuals who purchase their system may qualify for the federal solar tax credit. Those who lease their solar panel systems do not qualify. (That said, the company you lease the equipment from may be eligible to receive the credit and extend those savings to you as a discount on your monthly payment.)
Your system must be installed on your primary or secondary residence. Most people who choose to install solar also live in the home either full- or part-time. If, however, you choose to install solar on an investment property (i.e., one that you rent out full-time), then you cannot claim the Residential Clean Energy Credit, though you may be eligible for business or commercial solar tax credits.
You must owe federal income taxes. The Residential Clean Energy Credit is not a discount or rebate; it is a tax credit, meaning you must have sufficient federal tax liability in order to receive the credit. If your federal tax liability is too small to claim the full value of your credit in the year of installation, you can roll over any remaining credit to subsequent years until 2032, when the current tax credit is due to expire. Homeowners who do not owe any federal income taxes (most often, retirees) cannot benefit from the tax credit.
Your system must be new. To qualify for the Residential Clean Energy Credit, your system must be new (or being used for the first time). Preowned or refurbished systems do not qualify. Note that Palmetto only sells new solar energy systems for purchase.
Any costs associated with the installation may be eligible for the Residential Clean Energy Credit. These include components, such as mounting equipment, batteries, and wires, along with labor, assembly, and inspection.
If your home requires site improvements such as a new roof or wiring upgrades prior to installation, these costs may also be eligible for the Residential Clean Energy Credit when folded into the total cost of your project.
Please consult a tax, legal, and/or accounting advisor to determine your eligibility and potential credit.
Forms and Documents
In order to claim the Residential Clean Energy Credit, you must complete IRS Form 5695 and Form 1040 and submit these documents when filing your annual taxes.
Form 5695 is used for claiming Residential Energy Credits, such as from solar panel systems, solar battery storage, solar water heaters, and wind turbines. The form and instructions can be found below on the IRS website.
For more information on filling out Form 5695, visit: How to Fill Out IRS Form 5695.
Once you have completed Form 5695, you will then want to add this information to Form 1040 when filing your taxes. The form, along with helpful instructions, can be found below on the IRS website.
Next Steps
Homeowners who choose to finance their solar energy system are encouraged to apply the full value of their 30% Residential Clean Energy Credit towards their solar loan before the loan reamortizes, typically in month 19. Most solar loans are structured around the Residential Clean Energy Credit, and thus assume that you will make a 30% balloon payment (or multiple payments that total 30%) before your loan reamortizes.
However, your exact percentage may vary.
It’s important to note that, unlike the nature of rebates and refunds, you cannot apply any tax credit directly to your solar loan. Instead, you will need to use the forms listed above to apply those credits towards your federal or state income tax liability, then apply the total value of those savings towards your solar loan as a 30% balloon payment or payments prior to reamortization.
If you choose not to apply the total 30% value of your solar energy credit towards your solar loan in or before month 18, your monthly loan payment may increase in month 19 to reflect the remaining balance on your loan and get locked in at a higher monthly rate.
To learn more about loan reamortizations, visit: Why Solar Loans Reamortize in Month 19
Disclaimer: This content is for educational purposes only. Palmetto does not provide tax, legal, or accounting advice. Please consult your own tax, legal, and accounting advisors.