Solar tax credits

*Disclaimer: NATiVE is not a tax expert. This blog is just the basic info on the Solar Tax Credit  (ITC – investment tax credit).
Please consult with your tax professional.

It’s that time of year again—tax time!

But this year is different, because 2016 was the year you installed solar panels on your home, and now you’re ready to get that big fat tax credit to take 30% right off the top of that expense. And we’re here to help guide you through the process!

If you’re reading this and haven’t yet installed solar, you only have a couple more years to get this sweet tax credit. 30% off the cost of a system is nothing to scoff at people, but the tax credit won’t be that big after the end of 2019… so what are you waiting for? Get a FREE Quote from NATiVE for your solar panel system!

Solar tax credit FAQ:

Q: What is the solar tax credit?
A: Officially called the “solar investment tax credit” or ITC, it’s a dollar-for-dollar reduction in the federal tax bill of any homeowner who pays for a solar installation.

Q: How much do I get back from the solar tax credit?
A: 30% of costs, through 2019.
If you’re a homeowner who buys a solar panel system, you’re entitled to a tax credit of up to 30% of the total cost of that system. You can wipe out your entire tax bill if your credit is high enough, and you can take the credit over 2 years if you don’t owe that much taxes. For example, if you spend $20,000 on a solar system, your 30% tax credit would be $6,000. But if you only owe $4,600 in taxes for 2015, your tax bill will be reduced to zero, and you’ll receive an additional $1,400 tax credit on your 2016 return.

Q: Will the solar tax credit expire after 2019?
A: Nope! The residential solar tax credit will continue at 30% through the end of 2019, then “step down” to zero after 2022.

Q: Why does the ITC exist at all? Shouldn’t the industry stand on its own two feet?
A: Lots of businesses get subsidies from the government, and solar is one of the most important future planning technologies there is!
Solar is a key part of our nation’s plan to get off fossil fuels and help make a more reliable, sustainable energy future. But the ITC does more than that; the taxpayer investment in solar creates jobs, reduces prices for solar for everyone, and ensures this still-new industry grows large enough to sustain itself for long into the future.

Benefits for our tax dollar investment

Tax credit subsidies

What you need to claim the solar tax credit

KEEP IN MIND: We are solar guys, not tax guys. We do not give tax advice, and anything you read on this page is merely one example of how someone might act. Please consult a tax professional before filing.

Fill out your Form 1040 as you normally would. Stop when you get down to line 53, and move to Form 5695. Write or type your name in the space provided.

How To Fill Out Form 5695

We chose an example who spent $25,000 to install a 8 kW solar system on his home, and entered that number in line 1 below:
tax credit

So what’s a qualified solar electric property cost? Here’s what the instructions for Form 5695 say:
Include any labor costs properly allocable to the onsite preparation, assembly, or original installation of the residential energy efficient property and for piping or wiring to interconnect such property to the home.

Qualified solar electric property costs are costs for property that uses solar energy to generate electricity for use in your home located in the United States. No costs relating to a solar panel or other property installed as a roof (or portion thereof) will fail to qualify solely because the property constitutes a structural component of the structure on which it is installed. The home does not have to be your main home.

All that is a fancy way of saying “Pretty much any cost related to installation and materials counts. Claim it.” Next, unless you also installed solar water heating equipment or a geothermal heat pump, move on to line 5. Follow the instructions to complete lines 5, 6, and 7:
tax credit

Skip to line 12 unless you installed fuel cell property (huh?), and enter in any credit you’re carrying over from a qualified energy property installation from the previous year.
tax credit

Fill in line 13 with the total amount of credit from lines 6, 11, and 12. In Mr. Exampleson’s case, he has no prior-year credit to add, so he just puts the same $7,500 from line 6:
tax credit

Form 5695 Line 14 Worksheet – Reducing the credit

Line 14 is where it gets tricky. The thing about the solar tax credit is it isn’t “fully refundable,” meaning you can only take a credit for what you would have owed in taxes. That’s why you use the worksheet below. You enter the total tax you owe before credits in line 1 of the worksheet, and the amounts of any fully refundable credits on lines 2 through 8.

Add up the total credits on line 9 and subtract to get your total tax liability. That number goes on line 10 of the worksheet and line 14 of Form 5695.

Luckily, you can carry over the unused credit to the next tax year, so if you can’t claim the whole credit on your 2016 taxes, you get to reduce your 2017 tax bill, too. A tax liability calculation worksheet is provided in the instructions for Form 5695. Here’s what it looks like (keep in mind, this is a draft copy of the instructions, but it probably won’t change):
solar tax credit
Looks like the example only owes $4,600 in taxes this year, meaning that’s all the credit he can take now. He enters that on lines 14 and 15, and then enters $2,900, the difference between his total credit ($7,500) and the credit he can take this year ($4,600), into line 16.
solar tax credit
Finally, he enters the amount from line 15 on Form 5695 into the box on line 53 of Form 1040.
solar tax credit
That’s it! This example owes $0 taxes this year, and will get a further credit of $2,900 on his 2017 tax return. Now, check out the tax credit FAQ button. If you have any other questions, contact us!

Frequent Form 5695 Questions and Considerations

Q: I got a rebate from my utility company for my solar panels. Do I calculate the 30% tax credit before or after the reduction from the rebate?
A: We get this question all the time, and here’s the best answer: You calculate the 30% federal tax credit based on the cost to you AFTER any rebates. For example, if your system cost $20,000 and you get a $5,000 rebate from the utility, your federal tax credit would be 30% of $15,000, or $4.500.

Q: Should I claim the tax credit if I partially paid (e.g., a deposit) in 2016 for an installation that won’t be completed until 2017?
A: No, the instructions for Form 5695 say “Costs are treated as being paid when the original installation of the item is completed,” so you can claim all the costs for your installation no matter when they were paid, but you have to wait to claim them in the year the installation takes place. Keep receipts!

Q: If I installed a solar panel system a few years ago and now I want to add new panels, can I claim the credit?
A: Yes! You can claim the credit for any new costs associated with the addition. You can’t go back and claim the credit for the previously-installed equipment. Hopefully you already claimed the credit for those costs back then.

Q: If I install solar and claim the tax credit, will I have to repay the credit to the government if I sell the house within a certain number of years?
A: No! If you install a solar panel system on a home you own, you can claim the whole credit and sell at any point after. Keep in mind this is only true for homeowners. The law is significantly more complex for commercial solar installations.

Q: Can I get a tax credit if I install solar panels on rental property I own?
A: If the property is a rental only, you cannot claim the tax credit. HOWEVER, if you own the property and maintain it as a residence for a certain portion of the year (i.e., you rent it out while you’re away), you can claim the credit for the portion of the year you spend there. For example, if you install $20,000 worth of solar panels on a home in Florida that you live in from November 1st to May 1st, and you rent that home during the summer, you are entitled to take 50% of the possible tax credit, or $3,000 (50% of 30% of $20,000).

Q: I just had a quote from a solar company. They informed me I needed a new roof to hold the solar array. Can I get 30% back off the roof and the solar, as it was an additional cost?
A: Let’s be clear again that we’re not tax experts, but it looks like the answer is yes. Early in this article, we quoted the instructions for Form 5695. Here that is again: No costs relating to a solar panel or other property installed as a roof (or portion thereof) will fail to qualify solely because the property constitutes a structural component of the structure on which it is installed. Iit looks like a roof that is built to be able to hold a solar array counts as a structural component, and therefore counts as a cost of the project. Thanks, IRS!