It’s tax season again and that means it’s time to answer all your frequently asked questions about the federal solar tax credit for the 2021 tax season. Got lots of questions about it? Don’t worry, you’ve come to the right place. Let’s get right into it.
1. What is the solar tax credit for 2020?
Simply stated, the solar tax credit, also known as the ITC is a 26% federal tax incentive on the cost of your solar panel system.
It can be used on your federal taxes in 2021 if:
- You purchased your solar system with cash or loan (leasing or PPA financing cannot claim the tax credit).
- You have federal income tax liability. See more about qualifications below.
2. How does the federal solar tax credit work?
The federal solar tax credit is a 26% tax credit that can be applied to your federal taxes during the year you have solar panels installed on your home.
Do you get a tax credit for installing solar panels?
Yes, as long as you purchase, instead of lease your solar panel system. The tax credit applies to the cost of equipment plus installation. The tax credit can be applied to your federal income tax liability and can be rolled over for up to five years.
3. How much is the federal tax credit for solar panels?
The federal tax credit for solar panels is currently at 26%, its highest available rate. That means serious savings on your tax returns when it comes time to file. For another two years, the 26% federal solar tax credit presents a huge opportunity for savings. The current rate is thanks to the newly signed legislation which removed the originally established timeline for the tax credit.
Now, instead of expiring at the end of 2020, the 26% solar tax credit will renew in 2021 and remain in place through 2022. After 2022, the tax credit will then drop to 22% in 2023.
This is an encouraging sign of things to come as more legislation is planned in the coming years that will further incentivize more homeowners to install clean, renewable energy.
4. Does the solar tax credit include battery storage?
The federal solar tax credit also applies to home battery storage like the Tesla Powerwall. Get even more value from your home’s solar system by installing a backup battery like the Powerwall while the federal government is still offering the 26% tax credit. There is one important thing to consider in regards to the federal tax credit and solar batteries: you are eligible for the tax credit on a battery only if the energy used to charge the battery comes 100% from solar and not from the electric company’s grid.
Can I add a battery to my system and still qualify for the solar tax credit?
Listen up homeowners who already own a solar system! This federal tax credit could also be for you if you decide to add a battery to your system. According to a 2018 private ruling, the IRS clarified that the tax credit can still be applied to a battery if it’s added within a year of your solar installation.
5. Can I get a tax credit for leasing solar panels?
Unfortunately, you can only claim the solar tax credit if you purchase your solar panel system. This means with cash or with a solar loan. If you sign a lease or PPA with a solar installer, you are not the owner of the solar panel system and therefore you cannot receive the tax credit.
6. Do I qualify for the solar tax credit?
Here are a few of the main eligibility requirements for the solar tax credit.
- Your solar system was ‘placed in service’ between January 1, 2006, and December 31, 2021.
- The solar system is located at a residential location in the U.S. (but not necessarily your primary residence).
- You own the solar system ( you purchased it with cash or through financing)
- The solar system is new or being used for the first time. The tax credit can only be claimed on the “original installation” of the solar equipment.
A few other things to note when filing your taxes:
- If you received rebates or grants when installing your solar panels, you calculate the total cost after applying them, as rebates are meant to reduce your total cost. For example, if your solar panels cost you a total of $20,000, but your utility company offered you a rebate of $2,000, your total cost would be $18,000, which is the number you would use in your taxes.
- If you have a state tax credit for solar panels, in addition to the federal solar tax credit, you don’t need to do any extra math for your federal solar tax credit filing. State and federal tax credits are both calculated based on the total amount you paid.
7. Can you claim solar tax credit twice?
You cannot technically claim the solar tax credit twice if you own a home; however, you can carry over any unused amount of the credit to the next tax year for up to five years. Note: if you own more than one home with solar, you may be eligible. In this case, contact your tax professional to find out more.
8. What if the solar tax credit exceeds my tax liability?
This is a nonrefundable tax credit, meaning you will not get a tax refund for the amount of the solar tax credit that exceeds your tax liability. Same as the question above; however, you can carry over any unused tax credit to the next year, up to five years.
9. Can I use the solar tax credit against the alternative minimum tax?
Yes. The tax credit can be used against either the federal income tax or the alternative minimum tax credit.
10. Is the solar tax credit going away?
Yes. The solar tax credit is going away completely after 2023. And 2022 the last year to claim the 26% solar federal tax credit. The solar investment tax credit was extended once before in 2015, but that extra time is quickly running out. The table below details how much longer the tax credit is available for, and for how much.
Bonus! How to claim the solar tax credit in 2021.
Here’s a step-by-step guide:
Please keep in mind, however, that we are not tax consultants. We do not give tax advice, we are merely offering a guide on what filling would look like with a fictitious example. Please consult a tax consultant before filing.
Before you file your taxes, you will need your solar installation receipts, the IRS Form 1040 for 2020, the IRS Form 5695 for 2020, and a calculator. When you have all these materials, you can get started on Form 1040. You will need to fill out a 1040 Schedule 3 Form as well.
To find the amount to list on the Schedule 3 Form, first fill out Form 5695.
Line 1 in the form is for Qualified solar electric property costs. You will enter the total cost for your solar panel system in that line. The total cost includes the cost of installation. Continue the instructions on the form to Line 5.
Lines 2 through 4 are for other renewable energy systems. If you have also installed those, you can enter those amounts. However, for the sake of this guide we will be discussing only solar panels.
On Line 5, you will add up the total amount from Lines 1 through 4. Continue to Line 6.
For Line 6, you will multiply the number from Line 5 by 26%, or 0.26.
If applicable to you, fill in Lines 7 through 12. Otherwise, skip to Line 13.
On Line 13, add the total amount of credit from Lines 6, 11, and 12. If you did not need to fill Lines 7 through 12, simply put the number from Line 6 here.
Line 14 comes with a worksheet, titled the Residential Energy Efficient Property Credit Limit Worksheet. Follow the instructions on that worksheet.
On Line 3 of the Worksheet, you will subtract the number on Line 2 from Line 1. The amount on Line 3 of the worksheet form is what you will put on Line 14 of Form 5695.
On Line 15 of Form 5695, you will enter the smaller number of Lines 13 and 14. For example, if Line 13 had 9,000 listed, and Line 14 had 4,500 listed, you would put 4,500 on this line. This is the amount you enter on your 1040 Schedule 3 form, as well as your 1040.
For Line 16, look at Lines 13 and 15. If the number in Line 15 is less than the number in Line 13, subtract Line 15 from Line 13. If Line 13 had 9,000 and Line 15 had 4,500, you would subtract 4,500 from 9,000, which would equal 4,500. You would put that number in Line 16.
The number in Line 16, if the line is filled, is any carryover tax credit you may have from your solar panels. That amount of credit is rolled over to the next tax year when it can be used again.
Form 5695 example
We’ll use a fictional example to show what all this will look like step by step- let’s call the person filling Mr. Jones.
- Mr. Jones purchased and installed a solar panel system in 2020, and the total cost was $30,000.
- He puts 30,000 in Line 1 on Form 5695.
- Lines 2 through 4 don’t apply to him, so he leaves those blank.
- On Line 5, he puts 30,000.
- For Line 6, he multiplies 30,000 by 26%, or 0.26, which equals 7,800. So he puts 7,800 on Line 6.
- Lines 7 through 12 don’t apply to him, so he skips them.
- On Line 13, he adds Lines 6, 11, and 12, but only Line 6 was filled, which is 7,800. So Line 13 is 7,800.
- On Line 14, he goes through the worksheet and comes up with the number 4,500, which is what he puts on Line 14.
- On Line 15, he puts 4,500 again, because it was the smaller number of Line 13 and Line 14. Line 16 also has 4,500.
So in total, Mr. Jones claimed $7,800 in tax credits, and $4,500 of that was used to pay for his taxes that year. The other $3,300 is rolled over for the next year, where he can again use it to help cover his taxes.
If you have any questions or concerns while doing this, please contact your tax consultant. They will help you with not just your federal solar tax filing, but with the rest of your taxes as well.
Got more questions about the Tax Credit?
Contact the Internal Revenue Service, located at 1111 Constitution Avenue, N.W., Washington, DC 20224, or phone at (800) 829-1040.
Want to know more about going solar?
Here at Sunpro Solar, we provide high quality solar panels and installation service and do not lease solar panel systems. Our team of solar professionals will work with you to ensure you satisfy the requirements for this valuable federal solar tax credit. We will also provide you with a sample federal tax form to make filing easy.
Now is the time to take advantage of the solar investment tax credit. Contact our team of dedicated solar experts at Sunpro Solar today!Free Solar Quote
Sunpro Solar does not provide tax advice. Be sure to speak with your tax consultant if you have questions about your personal situation.
Disclaimer: This webpage provides an overview and does not constitute professional tax advice or other professional financial guidance. It should not be used as the only source of information when making purchasing decisions, investment decisions, or tax decisions, or when executing other binding agreements.