Form 5695 instructions: How to claim the solar tax credit

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If you're considering solar or you already have a solar system on your property, you've probably heard about the federal solar tax credit, also known as the Investment Tax Credit (ITC). The ITC is one of the best ways to save money when you go solar because it reduces your overall costs by thousands of dollars.

That's because it makes going solar significantly more affordable for homeowners and businesses by granting a dollar-for-dollar reduction to your tax bill equal to 30% of the total cost of a solar energy system. There's plenty of information out there about the value of the ITC, but figuring out how to claim the credit when it comes time to file your taxes is another story. In this article, we'll walk you through the step-by-step instructions of how to claim your federal solar tax credit in 2024.

There are three main steps you'll need to take to benefit from the ITC:

1. Determine if you're eligible

2. Complete IRS Form 5695

3. Add to Schedule 3 and Form 1040

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Key takeaways

  • Claiming the federal ITC involves determining your tax liability and completing the proper forms.

  • Due to the Inflation Reduction Act, the federal ITC has jumped up to 30% for all systems installed in 2023.

  • To claim the solar tax credit, you'll need first to determine if you're eligible, then complete IRS Form 5695 and finally add your renewable energy tax credit information to Schedule 3 and Form 1040.

Form 5695 is the official IRS tax form you must use to claim the federal solar tax credit when you file your taxes. You can download a copy of Form 5695 (PDF) on the IRS website. The form is updated every year, so make sure you use the most recent version available.

What’s new on Form 5695 this year is the ability to claim credit for qualified battery storage technology. As long your costs for installing battery storage were incurred after Dec. 31, 2022, they are eligible to qualify for the ITC.

You are eligible for the Federal ITC if you own your solar energy system rather than lease it. If you sign a lease agreement, the third-party owner gets the solar tax credit associated with the system. This is also true for the vast majority of state and local incentives for solar. In some special cases, a lease will grant you the financial benefits associated with the sale of solar renewable energy certificates (SRECs). You're also eligible even if the solar energy system is not on your primary residence – as long as you own the property and live in it for part of the year, you can claim the solar tax credit.

Suppose your federal tax liability is lower than the total amount of your ITC savings. In that case, you can still use it by carrying over any remaining credits to the following year. For example, let's say you spend $25,000 to install a solar system on your home in 2023, which means you are eligible for a $7,500 federal solar tax credit. If your federal tax liability for 2023 is only $5,000, you will owe no federal taxes that year, and in 2024, you'll reduce your tax liability by $2,500.

Solar System Cost: $25,000
ITC Amount: $7,500
Tax Liability Year 1
Tax Liability Year 2
Tax Liability Year 3
Effective Total Solar System Cost
ITC used completely in year 1Before ITC$8,000$8,000$8,000$25,000
After ITC$500$8,000$8,000$17,500
ITC used completely over 2 yearsBefore ITC$5,000$5,000$5,000$25,000
After ITC$0$2,500$5,000$17,500
ITC never applies due to low tax liabilityBefore ITC$0$0$0$25,000
After ITC$0$0$0$25,000

Claiming the ITC is easy. To get started, you'll first need your standard IRS 1040 Form, IRS Form 5695, "Residential Energy Credits," and the instructions for Form 5695. The purpose of Form 5695 is to validate your qualification for renewable energy credits.

New IRS Form 5695 solar tax credit

1. Enter your energy efficiency property costs

Form 5695 calculates tax credits for various qualified residential energy improvements, including geothermal heat pumps, solar panels, solar water heating, small wind turbines, and fuel cells. We'll use a solar energy system's $25,000 gross cost as an example.

First, you will need to know the qualified solar electric property costs. This is the total gross cost of your solar energy system after any cash rebates. Add that to line 1. Next, insert the total cost of any additional energy improvements on lines 2 through 5 and add them up on line 6a. In this example, we'll assume you don't have any additional energy efficiency property costs.

On line 6b, multiply line 6a by 30%. This is the total value of your tax credit (but not necessarily the amount you'll receive, depending on your tax liability).

Please note: line 6b will say 30% once the IRS updates these forms. The calculations are based on 30%.

Assuming you're not also receiving a tax credit for battery storage or fuel cells installed on your property and aren't carrying forward any credits from last year, put the value from line 6b on line 13 of Form 5695.

2. Determine your tax liability

Now you need to calculate if you have enough tax liability to get the full 30% credit in one year. You must have completed sections 1 through 18 on your standard 1040 Form to get started. For this example, we'll assume your tax liability equals $5,000.

Tax liability

Now, you'll need the instructions for Form 5695. On page 4, you'll see a worksheet to calculate the limit on tax credits you can claim. Add the number on line 18 of your 1040 Form to line 1 of this worksheet. If you're claiming tax credits for things like adoption expenses, interest on a mortgage, or buying a plug-in hybrid or electric vehicle, you'll need that information in line 2. You'll then subtract the number on line 2 from line 1 to determine your residential energy-efficient property credit limit. (For this example, it's still equal to $5,000).

Residential Energy Efficient Property Credit Limit worksheet

3. Calculate your tax credit

Finally, enter the result of line 3 of the worksheet on line 14 of Form 5695. Review line 13 and line 14, and put the smaller of the two values on line 15.

If your tax liability is smaller than your tax credits, subtract line 15 from line 13, and enter it on line 16. That's the amount you can claim on next year's taxes.

Next year's taxes

The value on line 15 is your amount of renewable energy credit this year. You must add that number to Schedule 3 and, ultimately, to your regular tax form, IRS Form 1040.

5. Enter value into Schedule 3

First, you need that number on line 15 from Form 5695, which, in our example, is $5,000. Add this number to line 5 on Schedule 3 (and make sure to attach Form 5695).

Residential energy credits

After adding in any other nonrefundable tax credits (which our example is $0), you'll add up your total sum of refundable tax credits on line 8.

Total sum of refundable tax credits

6. Add value to Form 1040

Finally, you'll need to take the number from Schedule 3, line 8, and add it to Form 1040, line 20 and you will have completed all the necessary steps to filing out your tax forms.

Claiming solar tax credit

What does 30% mean for the average solar shopper? According to EnergySage Marketplace data, the average national gross cost of installing a solar panel system in is $20,000-$30,000. At that price, the solar tax credit can reduce your federal tax burden by by as much as $9,000, bringing your total cost down significantly – and the ITC is just one of many rebates and incentives that can reduce the cost of solar for homeowners.

How does the solar tax credit work in 2023?

The federal solar tax credit allows you to deduct 30% of the cost of installing a solar energy system from your federal taxes. 

What is the federal solar tax credit income limit for 2023?

There is no income limit on the ITC program, so taxpayers in all income brackets may be eligible.

When can I claim my solar tax credit?

You can claim the federal solar tax credit this year as long as you have a tax bill for 2023. However, if you don’t owe any taxes this year, you can carry the credit forward each year until 2034 when the ITC is set to expire. For example, if you don’t have a tax bill in 2024, you can’t claim your credit that year, but you can carry it forward again to 2025 and claim the credit that year instead. You’re also about to carry the credit back one year if you had a tax bill in 2022 but not 2023.

What are the steps for claiming solar tax credit in 2023?

There are three main steps you'll need to take to benefit from the ITC:
1. Determine if you're eligible
2. Complete IRS Form 5695
3. Add to Schedule 3 and Form 1040

If you haven't started your solar journey yet, you first need to know that the best way to maximize your return on investment is to compare quotes. On the EnergySage Marketplace, you'll receive free, custom quotes from our network of pre-vetted installers. And remember: because the ITC is currently set at 30%, as long as you have enough tax liability, you'll receive a tax credit equal to 30% of the total cost of your solar system.

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