GUIDE TO THE FEDERAL INVESTMENT TAX CREDIT FOR SOLAR PV
What is a tax credit?
A tax credit is a dollar-for-dollar reduction in the amount of income tax you would otherwise owe. For example, claiming a $1,000 federal tax credit reduces your federal income taxes due by $1,000
What is the solar energy investment tax credit?
- The federal investment tax credit (ITC) is a tax credit that can be claimed on federal income taxes for 30% of the
cost of a solar photovoltaic (PV) system.
- The system must be placed in service during the tax year and generate electricity for a home located in the U.S.
- A solar PV system must be placed into service before December 31, 2019, to claim the ITC
- There is no maximum amount that can be claimed
Am I eligible to claim the investment tax credit?
You might be eligible for this tax credit if you meet all of the following criteria:
- Your solar PV system was ‘placed in service’ between January 1, 2006, and December 31, 2019.
- The solar PV system is located at a residential location in the U.S. (but not necessarily your primary residence).
- You own the solar PV system ( e.g., you purchased it with cash or through financing)
- The solar PV system is new or being used for the first time. The ITC can only be claimed on the “original
installation” of the solar equipment.
What is the difference between a tax credit and a tax rebate?
It’s important to understand that this is a tax credit and not a rebate. Tax credits offset the balance of tax due to the government (therefore, if you owe no tax, there is nothing to offset and you can’t take advantage of it). Tax rebates are payable to the taxpayer even if they owe no tax. While most people qualify for the solar tax credit, there are some who do not. Anyone who does not owe federal income taxes will not be able to benefit from the tax credit. And, if you’re on a fixed income, retired, or only worked part of the year, you may not owe enough energy taxes to take full advantage of this credit.
If you do owe sufficient federal taxes the year that you finance or purchase your system, then the credit can be applied to pay off the taxes owed. If you already paid that taxes by withholding it from your paycheck, the federal government will apply the tax credit to a tax refund. This refund can be used to pay down the balance on a loan. It’s important to note that the tax credit be carried forward one year, which means that you can use any remainder from this year as a credit towards next year’s taxes.
FAQ Solar Energy Tax Credit
- WHAT IF THE TAX CREDIT EXCEEDS MY TAX LIABILITY? WILL I GET A REFUND?
This is a nonrefundable tax credit, meaning you will not get a tax refund for the amount of the tax credit that exceeds your tax liability. However, you can carryover any unused amount of tax credit to the next tax year.
- CAN I USE THE 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.
- HOW DO I CLAIM THE ITC?
After seeking professional tax advice and ensuring you are eligible for the ITC, you can fill out and attach IRS Form 5695 to your federal tax return (1040 or Form 1040NR). Instructions on filling out the form are available HERE.
•Internal Revenue Service, located at 1111 Constitiution Avenue, N.W., Washington, DC 20224, and phone at (800) 829-1040.
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.