How does the solar tax credit work?

The US government is encouraging home owners in the United States to switch to solar power by offering a tax credit for solar systems installed on their homes. The Inflation Reduction Act that was passed in late 2022 extended the previous solar tax credit and increased the amount as well. 

If you had a solar installed installed on your home, you generally can claim a solar tax credit to lower your tax bill. The Residential Clean Energy Credit is non-refundable which means it can offset your income tax liability dollar-for-dollar, but any excess credit won’t be refunded. If the credit is a greater amount than your tax liability for the year, you can roll over the unused portion to future years as long as the credit remains in effect. There are no income limits on the solar tax credit. This means all individual taxpayers are eligible to claim the credit on qualifying solar energy equipment investments made to their homes within the United States.

 To qualify for the solar tax credit on your tax return, you’ll first need to meet the following criteria:

• Your solar system was installed between January 1, 2017, and December 31, 2034.
• The system must have been installed on a residence of yours within the United States.
• The solar equipment is new or being used for the first time (meaning it wasn't previously installed elsewhere and moved to it's current location).
• The system was purchased with cash or through some form of financing that isn’t a lease or an agreement to pay a solar company for electricity generated by the system.

The following explains the amount you should receive depending on what year your system was installed. 

• 30% for equipment placed in service in tax years 2017 through 2019
• 26% for equipment placed in service in tax years 2020 through 2021
• 30% for equipment placed in service in tax years 2022 through 2032
• 26% for equipment placed in service in 2033
• 22% for equipment placed in service in 2034

To claim the tax credit you'll need to submit a 5695 Tax Form with your tax return. You're instructed to calculate the credit on Part 1 of the form and the enter the result on your 1040. You can locate a direct download for the form as well as an example below. 

If your credit is higher than you have in income tax due - an $8,000 credit on a $5,000 tax bill for this example - you won't get the $3,000 cash back from the IRS. The remaining $3,000 would carry over to the next year and still offset dollar-for-dollar on your next year's taxes. 

1. File IRS Form 5695 with your tax return
2. In Part I, calculate the credit of the tax form
3. File your solar system under the section labeled “qualified solar electric property costs” 
4. On line 1, enter your project’s total costs as written in your solar contract
5. On lines 6a and 6b, complete the calculations
6. On line 14, calculate any tax liability limitations using the IRS’s Residential Energy Efficient Property Credit Limit Worksheet
7. On lines 15 and 16, complete the calculations
8. On line 5, enter the exact figure from line 15 on your Schedule 3 (Form 1040)