One of the biggest incentives for installing a solar energy system is the Federal Solar Tax Credit. It is a project by the U.S. government to try and encourage Americans to use solar power, hence offering them tax credits for their systems.
Solar energy has lots of benefits, such as the fact that it is pollution-free, reduces the use of coal and other fossil fuels, and reduces one’s carbon print. However, there is a lot of confusion regarding the Federal Solar Tax Credit, as so many people are not aware of how it works and if they are eligible.
If you wonder what the solar tax credit is and its benefits, then read on. Below is our guide.
- 1 What Is the Federal Solar Tax Credit?
- 2 How Does the Federal Solar Tax Credit Work?
- 3 What Is the History of Federal Solar Tax Credit?
- 4 Who Is Eligible for the Federal Solar Tax Credit?
- 5 What Homes Qualify for Federal Solar Tax Credit?
- 6 What Energy-saving Equipment That Qualifies for Federal Solar Tax Credit?
- 7 How Do You Claim the Federal Solar Tax Credit?
- 8 How Do You File Form 5695 with Your 1040 Individual Tax Return?
- 9 Conclusion
What Is the Federal Solar Tax Credit?
The Federal Solar Tax Credit is a credit you receive when filing your annual tax return. It is also known as Investment Tax Credit. It allows customers to deduct up to 30% of what was incurred in installing a complete solar system from their federal tax bill.
For example, if you purchase a solar system and have it installed on your property for use in your home or business, then a percentage of the system cost will be reduced from your tax burden.
How Does the Federal Solar Tax Credit Work?
The Federal Solar Tax Credit qualifies you for a credit of up to 30% of the total costs incurred. However, this percentage depends on when you installed the equipment. For example;
- 30% for equipment placed between 2017 and 2019
- 26% of equipment between 2020 and 2022
- 22% of equipment placed in 2023
This means that if, for example, you installed your solar power system between 2020 and 2022, you will be rewarded a 26% tax credit for investing in solar energy. It will cover the equipment, permit, and installation costs. However, it is crucial to note that the solar tax credit will expire in 2024 for residential installs.
What Is the History of Federal Solar Tax Credit?
The Federal Solar Tax Credit was first offered through the Energy Policy Act of 2005 to expand the U.S. renewable energy market. It is a percentage of the total qualified and incurred costs of installing a solar energy system.
The tax credit was initially set to expire in 2007, but it has been extended multiple times since then. In 2015, the Omnibus Appropriates Act (PL114-113) included a several-year extension with a step-down tax credit, meaning that it will drop over time. This is why starting 2021, the credit tax dropped to 22%, and 0% for residential, 10% for commercial in 2022. The current federal solar tax credit is set to expire in 2024.
Who Is Eligible for the Federal Solar Tax Credit?
For you to be eligible, you should meet the following requirements:
- The system should be installed and in service after January 1st, 2006, and before December 21st,2021
- You must be the homeowner
- The system should be purchased and owned by the applicant. A lease or power purchase agreement does not qualify you for the credit
- The solar energy system must be located in the United States
- You must have enough personal income tax and federal tax liability to apply
- The electricity produced should not be used to heat a hot tub or swimming pool
What Homes Qualify for Federal Solar Tax Credit?
The following homes qualify for Federal Solar Tax Credit:
- Mobile home
- Cooperative apartment
What Energy-saving Equipment That Qualifies for Federal Solar Tax Credit?
The following types of energy-saving equipment qualify for Federal Solar Tax Credit:
- Solar power storage equipment
- Solar powered units
- Small wind turbines
- Solar-electric collecting roofs
- Fuel cell property
How Do You Claim the Federal Solar Tax Credit?
When claiming your federal solar tax credit, it is crucial to know every cost incurred in the final system cost. This is where receipts come in handy. You will need a record of every transaction made, as a paper trail will be required before you get your hands on the money. The more you spend on your project, then the more significant your credit.
Below are some of the expenses that you are allowed to claim:
- Electrician fees
- Solar equipment cost
- Freight shipping costs
- Professional installer fees
- Engineer fees
- Solar consulting fees
- Tools used, whether bought or rented
- Permitting fees
- Equipment rented or purchased, such as scaffolding
- Permitting service costs
- Any miscellaneous solar costs
The costs and fees will vary with every person since everyone purchases and installs their systems differently. It is crucial to note that if you decide to go the DIY route and install the system yourself, you will not claim labor cost on the tax credit.
How Do You File Form 5695 with Your 1040 Individual Tax Return?
You will need to prove to the government that you spent the money to claim your solar tax credit. This is where IRS Form 5695 comes in for residential energy credit. In case you are unsure of something, ensure that you consult with your tax accountant.
The steps for filing include:
- Have all your receipts ready and in a safe place.
- Ensure that you are eligible for the tax credit with the requirements mentioned above. They include owning the system and owing income tax to the government.
- Complete the IRS Form 5695. Focus online 1, which is for solar electricity. Put all your total energy costs into line 1. Once this is done, add lines 1 through 4 and put the total in line 5. After that, multiply line 5 by the percentage, for example, 26%, and enter the result into line 6. This amount is the tax credit.
- Add your credit information to your 1040 form. With these simple steps, you will be done filing!
With the solar tax credit expiring soon, it is essential not to waste time. Get a quote from your solar panel installer as quickly as possible to be eligible for Federal Solar Tax Credit.
If there are some things you are unsure of, seek a professional’s help to navigate the process. They will help you get through it and file your credit tax effectively.