In an effort to encourage Americans to use solar power, the U.S. government offers tax credits for solar-powered systems. Let's take a closer look at some of the benefits of the solar tax credit and how you can claim it.
Tax benefits of going solar
Tapping the sun for power offers several benefits. For example, solar power:
Reduces our use of coal and other fossil fuels
Reduces your individual carbon footprint
But since the installation of solar power equipment can be costly, the solar tax credit can help you offset some of the costs.
Solar tax credit amounts
Installing renewable energy equipment in your home can qualify you for a credit of up to 30% of your total cost. The percentage you can claim depends on when you installed the equipment.
30% for equipment placed in service between 2017 and 2019
26% for equipment placed in service between 2020 and 2022
22% for equipment placed in service in 2023
As a credit, you take the amount directly off your tax payment, rather than as a deduction of your taxable income.
To qualify for the solar credit, you must have made energy-saving improvements to your U.S. residence, which can include your:
Manufactured home that conforms to Federal Manufactured Home Construction and Safety Standards
Qualified energy-saving equipment includes:
Solar-powered units that generate electricity or heat water
Geothermal heat pumps
Small wind turbines
Fuel cell property (limit $500 for each half kilowatt of capacity)
Solar-electric collecting roofs and roof products
Solar power storage equipment
Some installation and labor costs
The solar tax credit doesn't apply for systems that you lease or for systems that you use to heat a swimming pool or hot tub.
Claiming the solar credit for rental property you own
You can't claim the residential solar credit for installing solar power at rental properties you own. But you can claim it if you also live in the house for part of the year and use it as a rental when you're away.
You'll have to reduce the credit for a vacation home, rental or otherwise, to reflect the time you're not there.
If you live there for three months a year, for instance, you can only claim 25% of the credit. If the system cost $10,000, the 26% credit would be $2,600, and you could claim 25% of that, or $650.
$10,000 system cost x 0.26 (26% credit) = $2,600 credit amount
$2,600 credit amount x 0.25 (25% of the year) = $650 credit amount
Filing requirements for the solar tax credit
To claim the credit, you must file IRS Form 5695 as part of your tax return. You'll calculate the credit on Part I of the form, and then enter the result on your 1040.
If in 2020 you end up with a bigger credit than you have income tax due — a $3,000 credit on a $2,500 tax bill, for instance—you can't use the credit to get money back from the IRS. Instead, you can carry the credit over to tax year 2021.
If you failed to claim the credit in a previous year, you can file an amended return.
Currently, the residential solar tax credit is set to expire at the end of 2023. If you're thinking about adding solar energy to your home, now might be the right time to act.
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