The Residential Clean Energy Credit, commonly known as the Solar Tax Credit, is one of the biggest draws for homeowners turning to solar energy. This residential energy credit can save you a lot of money in taxes, but you must make a proper claim using Form 5695 to receive that money.
If you’re wondering, “How do I fill out Form 5695 to claim the Solar Tax Credit?” then this article is for you. With these step-by-step Form 5695 instructions, you can better understand the process for receiving the credit you deserve.
What is IRS Form 5695?
Form 5695 is the document you submit to get a credit on your tax return for installing solar panels on your home. We commonly think of Tax Form 5695 as the Residential Clean Energy Credit Form.
You can request a copy of Form 5695 from the Internal Revenue Service (IRS) Website, and also review their Form 5695 instructions.
The document itself discusses a concept called “Residential Energy Credits” which is the specific term used by the IRS to calculate non-refundable credit for a residential energy-efficient property. However, only qualified residential energy-efficient improvements in the United States are eligible for the credits. This includes renovations such as residential solar panel systems, solar energy storage, fuel cells, geothermal heat pumps, and small wind turbines.
What is the Solar Energy Tax Credit?
The Solar Tax Credit is a federal tax credit for solar systems you can claim on your income taxes, and reduces your federal tax liability. The tax credit is calculated based on a percentage (30% in the year 2023) of the total cost of your solar energy system.
This federal residential solar energy credit makes solar energy more affordable by giving a dollar-for-dollar tax reduction. Your solar energy system must have started service during the current tax year to qualify for the credit and need IRS Form 5695.
Since these tax credits are not deductions, they generally reduce the amount of tax the claimant owes, which can create a tax refund. The tax credit is also not a “discount” as taxpayers still have to bear the cost of the improvements, and then claim the credit from the IRS when filing their tax returns. Taxpayers can claim these credits on IRS Form 5695 regardless of whether or not they itemize deductions on Schedule A.
To learn more, read Everything You Need To Know About The Solar Tax Credit.
How to Fill Out IRS Form 5695
The Residential Clean Energy Credit is a big incentive for people to adopt any number of energy-efficient systems on their property. Claiming the solar energy tax credit can offset some of the expenses of making energy-efficient improvements to your home.
However, not all taxpayers and improvements qualify for the credits. Your improvements must meet specific energy efficiency requirements, and first-time homebuyers must adhere to particular rules to qualify.
Review the IRS Form 5695 Instructions to confirm your eligibility. You can then complete the form and include it on Form 1040.
Step 1 - Calculate The Total Cost Of Your Solar Power System
The total system costs of the solar power system for your home is the gross (total) amount you spent on it from your solar company, minus any other cash rebates you received, including state tax credit, incentives, and rebates. Add this number to line 1.
Step 2 - Add Additional Energy-Efficient Improvements
Fill in the total cost of any other energy-efficient improvements you might have made on lines 2 through 4. These additional improvements can include home solar water heating, small wind energy generators, geothermal heat pump property costs, and more. Add these up for line 5.
Step 3 - Calculate The Tax Credit Value
Calculate the federal solar tax credit you qualify for by multiplying the number from line 5 by 30%. Place the answer on line 6.
Step 4 - Enter Your Tax Credit Value
Enter the value from line 6 on line 13 if you are not receiving a tax credit for fuel cells and don't have any tax credits to carry forward from the previous year.
Step 5 - Calculate Your Tax Liability
Calculate if you have sufficient tax liability from your taxable income to get the full 30% tax credit available in one year.
Step 6 - Calculate The Maximum Tax Credit You Can Claim
Calculate the maximum tax credit you can claim by turning to page 4 and completing the instructions for that worksheet. You will need to include any information about any other tax credits for which you qualify, including buying an electric vehicle, being a first-time homeowner, or interest on your mortgage.
Step 7 - Enter Your Maximum Tax Credit
Enter the result of line 6 (the limit of the tax credits you can claim) to line 14.
Compare the values of lines 13 and 14 and put the smaller of the two on line 15 of the form.
Step 8 - Calculate Any Carry-Over Credit
Compare your tax liability from step 5 with your tax credits. If your tax liability is smaller, calculate the amount you can claim on next year's taxes by subtracting the value on line 15 from line 13. Enter the result on line 16.
Step 9 - Enter Your Credit on Form 1040
The value you filled on line 15 is the amount the IRS will credit on your taxes this year. Enter this number on line 5 of Schedule 3 on Form 1040.
If you make additional energy-efficient home improvements in the fiscal year, you may qualify for other tax credits. If so, you will need to complete the second page of Form 5695.
Claim Your Solar Tax Credit With Form 5695
The solar tax credit makes investing in solar panels a wise financial investment for your home. Earning the Residential Clean Energy Credit includes the following steps:
- You must be eligible for residential energy credits.
- Form 5695 must be filled out correctly.
- You must include Form 5695 when you file your returns.
Palmetto is a clean energy company that believes solar power can change our world for the better, but we are not tax preparation experts. We recommend that you seek out the advice of a licensed accountant or tax professional if you have any specific questions about filling out Form 5695 to claim the Residential Clean Energy Credit.
Palmetto is committed to providing green solutions for a clean and renewable energy future, including solar power systems, battery storage, and our Palmetto Protect monitoring service. Contact us to learn more about how we can help you maximize your solar experience.