The Federal solar energy tax credit is a tax credit that’s available if you decide to install a solar system. 30% of the costs of equipment, permits, and installation can be claimed back via your Federal tax return.
The credit is applied to the following tax year, so if you spend $10,000 on a new solar system, you’ll be able to take a credit of $3,000 the next year.
This tax credit is available until 2022.
Table of Contents
- 1 What is the Federal Solar Tax Credit?
- 2 How Much Money Can Be Saved with this Tax Credit?
- 3 How Long is the Federal Solar Tax Credit Available for Use?
- 4 What Do You Need to Do to Claim the Federal Tax Credit?
- 5 Filing Form 5695
- 6 The Solar Tax Credit Explained in a Video
- 7 How to Get a Bigger Tax Refund This Year!
What is the Federal Solar Tax Credit?
The solar tax credit is a tax reduction on a dollar-for-dollar basis. If you have a $1 credit, you pay $1 less in taxes. It’s as simple as that.
If you owed $5,000 in taxes to Uncle Sam, you would be able to reduce your total tax bill to $2,000 if you invested $10,000 in a new solar-powered system.
Take note, this isn’t a refund. You need to owe taxes in order to take advantage of this credit. Luckily, most people are eligible because they owe taxes each year anyway. The Federal government wants to encourage Americans to invest in solar energy.
How Much Money Can Be Saved with this Tax Credit?
Claiming the Solar Investment Tax Credit is worth 30% of the system cost. This applies to paying contractors and the cost of the parts.
Anyone spending $10,000 on a solar system would be able to claim back $3,000 in credits.
The catch is that you must own the system. It doesn’t apply to solar leasing agreements. The person who owns the system claims the credit, so if you lease from a company, they get to claim the credit, not you.
With solar leasing, you can still save money on your bills, but you won’t be able to claim any tax incentives. This is a massive blow to the ROI of installing the system in the first place.
This credit makes such a difference that it’s highly recommended you finance a solar system if you don’t have the money immediately available to finance its installation.
How Long is the Federal Solar Tax Credit Available for Use?
The Federal government is gradually going to phase out the solar tax credit. It will remain at 30% for residential consumers until the end of 2019, so you’re running out of time to take advantage of the full credit.
By 2020, it’ll be worth 26%, then 22% in 2021. By 2022, residential solar systems won’t be eligible for this credit at all. Commercial products will still have the opportunity to claim the 10% credit, though.
Now has never been a better time to take advantage of this credit.
What Do You Need to Do to Claim the Federal Tax Credit?
Let’s look at the steps you need to follow if you’re going to file your own taxes. We recommend that you use online tax filing so you use the correct forms and don’t make any mistakes.
To claim the tax credit, you’ll need to file Form 5695 with your tax return. This is the form designed for residential energy tax credits.
Filing Form 5695
Step One – Make sure you have receipts for all expenses. Keep these together and store them safely, so you have them if you get audited.
Step Two – Confirm that you’re able to claim the tax credit in the first place. It’s easier than it sounds. If you own the system and you expect to pay Federal taxes this year, you’ve already qualified for the residential energy solar tax credit.
Step Three – Download and fill out Form 5695 in order to add up your credits and determine how much you’re eligible to claim from Uncle Sam.
Step Four – Include your information for the renewable energy credit on Form 1040.
The Solar Tax Credit Explained in a Video
It’s easy to claim the Federal solar energy tax credit with online tax filing. Their software will guide you through the process and provide all the right forms. Be sure to keep the receipts for everything. You’ll be expected to prove your expenditure if you get audited.
Some of the bigger expenses you’re able to take advantage of include: the cost of the solar equipment, shipping costs, consulting fees, installation costs, the purchases of any tools, rented heavy equipment, and all associated permitting costs.
Costs are always going to vary depending on your personal circumstances and the solar system you want to install.
The only thing you need to keep in mind is that you can’t claim your own personal labor as an expense.