Reasons Why Solar Tax Credit is a Big Deal in 2018


The Federal Solar Tax Credit is also called the Investment Tax Credit or the ITC. This lets the taxpayer deduct 30% of the federal taxes when a solar energy system has been installed. The ITC is applicable to commercial as well as residential systems. The best thing about it is that there is no cap on the value. With the ITC, the average shopper can save around $5,000 when one opts to go solar. The cost of solar and its perks and advantages have been spreading around the United States.

What does the federal solar tax credit extension mean for the solar industry?

The Federal ITC was established by the Energy Policy Act in 2005 and was supposed to expire in 2007. Fortunate, it has been extended over time and the expiration date has been pushed to the end of 2016. Experts believe that with the five-year extension added to it, it would also bring the solar industry to its complete maturity. Here are the specifics of what is called the Solar Tax Credit:

  • 2016-2019: This tax credit stays at 30% over the cost of the system. This is good for those who use solar power because this means that they can accumulate quite a big discount just for the solar panel system.
  • 2020: Owners of the commercial and residential solar can also deduct 26% of the cost of the system from the taxes.
  • 2021: Owners of the new commercial and residential solar can deduct 22% from the cost of the system from their taxes. Note that there is also no federal credit for the residential solar energy systems.
  • 2022 onwards: The owners of the new commercial solar energy systems usually deduct 10% of the total cost of the system from taxes. It is important to note that there is no federal credit for the solar energy systems of the residents.

Additionally, in previous years, the owners of the new solar energy systems cannot claim the tax credit unless the system has been operational. The legislation allows this to claim it the very minute that the construction of the very system begins. This starts operating on December 31, 2023.

Qualifications for the solar panel tax credit?

As long as the individual owns the solar energy system, then he is eligible for the solar tax credit. Even if there is not enough tax liability for the person to claim the whole credit in just a year, this can be “rolled over” to the remaining credits and can be used in the future as long as the tax credit is taking effect. Remember that if a lease is signed along with the PPA and the solar installer and the taxpayer is not the owner of the system, then a tax credit cannot be received.

Steps in Claiming the Solar Tax Credit

There is the claim that is filed when the taxpayer is filing yearly federal tax return. They must allow their accountant to know that they have gone solar in the previous year or if they file their own taxes. There are various sites that can guide taxpayers on how they can claim their solar ITC.

Three Tips for Those Who Are Considering to Go Solar:

  1. Homeowners who receive multiple quotes can save around 10% or even more.

It may be quite a big purchase but shopping for the solar panel installation requires lots of consideration and research as well as a well thorough review of the nearby companies in the area. US Department of Energy’s NREL or the National Renewable Energy Laboratory also recommended that the consumers must be compared for various solar options as possible so that paying inflated prices can be avoided and then offered by large installers in solar industry.

In order to find smaller contractors typically provide lower prices and there is a need to use the installer network such as EnergySage. Individuals can also receive free quotes from the vetted installers that are local to the individual whenever property is registered. Homeowners can also get around 3 or more quotes. They can expect savings between $5,000 to $10,000 on the solar panel installations.

  1. The biggest installers usually do not offer the best price.

The bigger is not always better is the very reason homeowners are encouraged to consider every solar option and not just the brand that is large enough to pay advertising. Recent reports conducted by the US government discovered that there are large installers around $2,000 to $5,000 that is more expensive than small solar companies. If there are offers for big installers in solar, then make sure that the bids along with the quotes are comparable from the local installers so that they are ensured that they do not overpay with the solar costs.

  1. It is important to compare all the equipment options.

The national scale installers do not just provide high options. They also have the tendency to provide few solar equipment options which can also have a significant impact on the system’s electricity productions. Collecting diverse array of solar bids, taxpayers can compare the savings and costs based on the different equipment packages that are available.

There are also multiple varieties to consider especially when seeking the best solar panels on markets. There are certain panels that can also have higher efficiency ratings than others. It also invests in the top line of the solar equipment. However, this does not always result in higher savings. The very way to find “sweet spots” for the property is to evaluate the quotes of the financing offers and the varying equipment.

Therefore, for every homeowner in early stages of shopping for the solar panel would always be a ballpark estimate of the installations. This can also offer up the long-term savings and the up-front cost based on the very locality and roof type of the solar panel.

How to Claim the Solar Tax Credit

Those who are considering to go solar most likely have heard about federal solar tax credit or ITC also known as the Investment Tax Credit. The Federal ITC makes more it more affordable for businesses and homeowners because they grant a dollar-for-dollar tax action and this is equal to around 30% of the over-all cost of the solar energy system.

30% for the shopper actually means that this is the average national cost for the individual when a solar panel is installed. This is around $18,840. For that price, the solar tax credit is reduced by $5,652. This is the federal tax for the solar panel. This is just one of the many incentives and rebates that can actually reduce the over-all cost of solar for those who own this.

There are information out there regarding the value of the residential ITC but it also figures out on how to claim the credit when it comes to file taxing. This is a whole other story whenever those who are into solar panel go through the process of filling up Forms 5695 to Form 1040 step by step.

The cost of solar is definitely dropping across the United States.

Three Steps When Claiming Solar Tax Credit

  • Taxpayers have to be determined eligible for the Federal ITC. They have to make sure that the credit for the ownership along with the federal tax liability is always in order.
  • Complete the IRS Form 5965 so that this can validate the qualification for the renewable energy credits.
  • Add the renewable energy credit information to the Form 1040.

First thing: IS the individual eligible for the solar tax credit?

An individual is eligible for Federal ITC as long as they are the owners of the solar energy system and not the one that leases it. If a lease agreement has been signed, then the third-party owner is the one that gets the solar tax-credit that is associated with the system. This is a true manifestation for the vast majority of local and state incentives for the solar system. There are also some special cases that allows the lease to grant the taxpayer the financial benefits that are associated with the sale of the SRECs or the solar renewable energy certifications. It is also eligible with the solar energy system that is not on the primary residence – as long as the property is owned, and this has been lived in part of the year. When these are all met, then the tax credit can be claimed.

If the federal tax liability is lower than the over-all total of the ITC savings, then the individual can still make the most out of this by carrying this over the credits that remain and utilize this in the following year.

How are IRS Forms 5695 for 2018 filled out?

Claiming ITC is easy. The only thing that must be completed is Form 5695. This is also referred to as “Residential Energy Credits.” This includes the final result of the form on IRS Form 1040.

How to Complete Form 5695

Form 5695 is what calculates the tax credits for various qualified residential energy improvements. Some of these are solar panels, small wind turbines, geothermal heat pumps, and fuel cells. This is used as the national average gross cost of the solar energy system as an example.

  • First, the individuals must know what the qualified solar electric property costs are. That is also the total gross cost of the solar energy system after the cash rebates. This must be added to Line 1.
  • Insert the total cost of the additional energy improvements, if these are applicable on lines 2 through 4 and then add these up on line 5.
  • On line 6, line 5 has to be multiplied by 30%. This is the total amount of the solar tax credit.
  • If the individual is not receiving tax credit for the fuel cells that have been installed on the property, then there is no need to carry forward any of the credits from previous years. The value from Line 6 will then be placed on Line 13.
  • The next step is to calculate if the individual has enough tax liability that will allow him to receive 30% credit in that year.
  • The worksheet on Page 4 of Form 5695 is then completed so that the limit on the tax credits that can be claimed is calculated. If the individual is claiming tax credits for interest on a mortgage, adoption expenses, buying a home for the first time, buying solar panel, electric vehicle or a plug-in hybrid, information must be listed down there.
  • The result is then listed on Line 14 of Form 5695. This is obtained from Line 13 and Line 14 and the smaller among the two values is written down on Line 15.
  • If the tax liability is smaller than the tax credits, then line 15 must be subtracted from line 13 and list this on Line 16. That is the amount that can be claimed on next year’s taxes.

 Add the Credit to Form 1040

 The value on Line 15 is the total that will be credited to the individual’s taxes for that year. The value is entered in Line 53 on Form 1040 and Line 50 on Form 1040NR.

The steps that have been listed above all outline the need to receive 30% of the cost of the solar panel that has been credited back. If there are energy efficiency improvements that must be done to one’s home in that year, then page 2 of Form 5695 must be completed. Either way, the individual must include this in Form 5695 when taxes are submitted.

The commercial and residential solar ITC has also helped the annual solar installation increase by around 1,600 percent since this ITC has been implemented. The existence of the ITC until 2021 also provides market certainty for businesses that can develop long term investments which also drive technological innovation and competition that can also lower the costs for the consumers.

Solar Energy Tax Credits

Solar Tax Credit

Federal Tax Credits of Solar Energy

Tapping the sun to acquire power feels very good. Solar power does not pollute but it reduces the use of fossil fuels and other coal and also reduce the individual carbon footprint. It is also up to five times expensive as electricity that is from natural gas and the other sources.

In order to encourage the Americans to use the solar power, the Department of Energy along with the Environmental Protection Agency run the Energy Star Program which among the other projects also offer the tax credits simply for the solar-powered systems.

Credits for approved solar installations

Installing the alternative energy equipment in one’s home can also qualify them for a credit that can amount to 30% of the total cost. The credit is made available until the end of 2019. The percentage usually steps down every year and then ultimate does so at the end of 2021.

The qualifying equipment also includes the solar-powered units that can generate the heat water or electricity. The credit can be made available for improvements especially when it is to make a residence for the individual. This can also apply to a second residence.

As credit, it is possible to take the amount directly off the tax payment and not make this a deduction from the taxable income. Aside from the cost of the system, there is also no limit to the total dollar amount of the credit.

How to Claim Solar Credits for Rental Property

It is not possible to claim credit simply for installing solar power at the rental properties that the individuals own. The exception is when the taxpayer lives in the house for just some time of the year and also use it as a rental while one is away. When one is needed to reduce the credit for the vacation home, rental and otherwise, also reflect the time that this was not there. If the individual lives there for around three months per year, for example, then the individual can claim 25% from the credit. The system usually costs around $10,000 which is the 30% credit from the $3,000 and can also claim a quarter from that, which is around $750.

Filing Requirements for Solar Credits

When claiming the credit, it is necessary that the individual must file the Form 5695 as well as part of the tax return. This can be calculated on the credit of the form. This is then entered as a result on the 1040.

If the individual ends up with bigger credit than the income tax due, then they cannot use the credit in order to get the money back from Internal Revenue Services. Generally, what they can do is carry the credit over to the following year. Unfortunately, it is not yet clear whether they can carry these unused credits to the years after the solar credit expires.

Residential Renewable Energy Tax Credit

The Consolidated Appropriations Act was signed in December 2015. It also has an expiration date for solar thermal technologies and PV and introduced the gradual step down in the value of the credit for the technologies. The credit that is delegated to the other technologies also expired toward the end of 2016.

Taxpayer can claim the credit of 30% that is considered qualified expenditures for the system that has served as a dwelling unit which is located in the United States. As long as this owned and used as a residence for a taxpayer, then this is what counts. The expenditures in relation to the equipment can also be treated and made the minute the installation of these solar panels are completed and finished. When the installation is set at the new home, then the date that is placed in the service of the occupancy from the homeowner. The expenditures also include the labor costs for every on-site preparation that is in the assembly of the installation of an original system. Preparing and wiring of an interconnected system to a home can also receive deductions from the federal tax.

Solar-Electric Property

  • 30% of the systems have been placed by December 31, 2019
  • 22% of the systems have been placed in service by December 31, 2021 and before January 1, 2022
  • Systems can also be placed in service between January 1, 2006 and December 31, 2021
  • The home that is served by the system does not have to be the principal residence of the taxpayer
  • 26% for the systems that have been placed in the service between December 31, 2019 and Janaury 1, 2021
  • There is also a maximum credit for the systems that is placed in service after 2008

Solar-Water Heating Property

  • 30% for systems have been placed in service by December 31, 2019
  • 22% for the systems have been placed in the service between December 31, 2020 and January 1, 2022
  • Systems are also placed in service between January 1, 2006 and December 31, 2021
  • Half the energy that has been used to heat the dwelling’s water ideally must come from solar and the solar water-heating property expenditures to make it eligible
  • The home is served by the system and it does not have to be the principal residence of the taxpayer
  • The tax credit does not also apply to the solar water heating property for hot tubs or swimming pool
  • Equipment must be certified for performance and pass the SRCC or the Solar Rating Certification Corporation or any comparable entity that has been endorsed by the government of the corresponding state where this property has been installed
  • There is no maximum credit for the systems that have been placed in service after the year 2008.
  • 26% for systems are placed in service that are between December 31, 2019 and January 1, 2021

 Fuel cell property

 The maximum credit is $500 for every half kilowatt

  • The fuel cell can also have a nameplate capacity at least 0.5 kW of electricity that uses an electrochemical process and the electricity-only generation efficiency is more than 30%.
  • The home served by the system must also be the principal residence of the taxpayer
  • If ever it is a joint occupancy, the most maximizing costs that can be taken into account by every occupant is $1,667 for every 0.5 kW. This does not necessarily apply to the married individuals who filed as joint. The credit can also be claimed for every individual that is proportional to the over-all costs that have been paid.
  • Systems must be put in service between January 1, 2006 and December 31, 2016
  • For the systems that have been installed in 2017, these are all considered not eligible

 Small wind-energy property

  • For the systems that have been installed in 2017, these are not eligible
  • Systems can also be placed in service between January 1, 2009 and December 31, 2016
  • There is no maximum credit that is placed for the systems after the year 2008
  • The home served by the system also does not necessarily have to be the principal residence of the taxpayer

Geothermal heat pumps

  • For systems that have been installed in 2017, these are not eligible.
  • Systems must also be placed in service between January 1 2008 and December 31, 2016
  • The home that is served by the system does not necessarily have to be the principal residence of the taxpayer
  • The geothermal heat pump can also meet the Federal Energy Star criteria
  • There is also no maximum credit for the systems that have been placed in service after the year 2008

Significantly, the American Recovery and Reinvestment Act of 2009 also repealed the previous limitation on using the credit for eligible projects that are supported by the “subsidized energy financing.” For projects that have been placed in service after December 31, 2008, then the limitation no longer applies.

Established by the Energy Policy Act of 2005, the FTC or federal tax credit for the reoprty ‘s residential energy initially started to work with solar-electric systems, fuel cells and solar water heating systems. The Energy Improvement and Extension Act of 2008 also extended the tax credit of the small wind-energy systems along with the geothermal heat pumps. This was made effective January 1, 2008. Other key revisions include the eight-year extension of credit until December 31, 2016. The ability to take advantage of the credit and set this alongside the alternative minimum tax. This also includes the removal of the $2,000 credit limit that is targeted solely for the solar-electric systems that started in 2009. The credit has also been further enhanced in February 2009 as conducted by the American Recovery and Reinvestment Act of 2009. This removed the maximum credit amount all on eligible technologies with the exception of fuel cells that have been placed pretty much in service after 2008.

Guide on How to Receive the 30% Credit from Solar Energy

The Solar Tax Credit is the Law that has been extended by legislature in December 2015 and it lets the taxpayer take the 30% credit, as long as it is a qualified expenditure for the solar system. This is considered qualified if it serves as a dwelling unit that is located in the US and is owned and also used as a home by the active taxpayer.

The expenditures in relation to the equipment are made when the installation has been completed. The eligible expenditure also covers the labor costs for preparation made on site, piping and wiring the interconnection of the system to the home and the installation of the original system. In a nutshell, this means that the entire value of the quote from this solar company can install the solar panels that are eligible for the tax credit.

To claim the 30% tax credit from solar energy, individuals must complete the Form 5695 and then add the results to the main tax return.

Here are steps on how to complete the Form 5695:

Form 5695 calculates the tax credits for various qualified residential energy improvements. You just need to worry about Line 1 for solar electricity. Also insert the total cost for the solar panel systems that include the installation listed into Line 1.

Assuming that the taxpayer is not receiving the tax credit for the fuel cells that have been installed on the property, then they do not carry forward the credits that have been accumulated form last year. If this is the case, the value from Line 6 is then put on Line 13.

The next step is to calculate if the taxpayer has enough tax liability to acquire the whole 30% credit that can be received for the year.

The worksheet on Page 4 of Form 5695 must then be calculated to come up with the limit on the tax credits that can be claimed. If they are claiming tax credits for interest on mortgage, buying a plug-in hybrid or electric vehicle, buying the home for the first time or adoption expenses, then there should be more information at hand.

  1. Enter the amount on Line 47 from Form 1040 or Line 45 from Form 1040.
    2. Enter the overall amount, if there are, of the credits from Lines 48 until 51 on Form 1040 and Line 22 on Schedule 4 or Lines 46 to 48 from Form 1040NR.
    3. Enter the amount om Line 40 from Form 5694.
    4. Enter the amount on Line 11 or Line 12 if the individual is claiming child tax credit.
    5. Enter the amount on Line 9 from Form 8396.
    6. Enter the amount on Line 16 from Form 8396.
    7. Enter the amount on Line 3 from Form 8859.
    8. Enter the amount on Line 15 from Form 8910.
    9. Enter the amount on Line 23 from Form 8936.
    10. Add the lines 2 to 9.
    11. Subtract Line 10 from Line 1. Enter the amount on Line 14 from Form 5695 as well. If it is zero or less, then just enter 0 on Lines 14 and 15 of Form 5695.
    12. Enter the result on Line 14 from Form 5695 and then review Lines 13 and 14 and put the smaller one among the two on Line 15.
    13. Add the Lines 6, 11 an 12.

This is hwo you come up with the Federal Tax Credit for Solar Energy.