2022 may have been a pretty tough year. But it brought at least some good news to homeowners who made the switch to clean and renewable solar energy.
The Solar Investment Tax Credit (ITC)—which was supposed to be phased out entirely after 2023—not only got extended all the way through 2034. It was also increased from 26% to 30%.
For anyone who qualifies, claiming the ITC will obviously mean filling out some extra forms. And, though the work involved is minimal, the IRS has a way of making even the simplest tasks a headache.
So, today, provide step-by-step instructions on how to claim the new and improved Solar Investment Tax Credit.
Who's eligible
You have to own your solar energy system. If you paid for it with a loan, that’s fine. But, if your system is leased or you’ve arranged to purchase electricity from someone else who owns it, you’re not.
The system has to be located at your primary or secondary residence. If it’s installed at a rental property or someplace else where you never reside, you’re not eligible. You have to own your solar energy system. If you paid for it with a loan, that’s fine. But, if your system is leased or you’ve arranged to purchase electricity from someone else who owns it, you’re not.
Installation of your solar system must be completed in the tax year for which you’re claiming the ITC.
What you'll need
In addition to the standard Form 1040 for the year you’re filing, you’ll need two other IRS forms and their instructions:
schedule 3 (Form 1040), “Additional Credits and Payments.
Form 5695, “Residential Energy Credits”
The only other documents you’ll need are the receipts for your solar installation.
How to claim your credit
Step 1: Calculate how much you're due
First, you’ll need to determine your “qualified solar electric property costs.” That’s the total cost of your solar energy system, including sales tax, permit fees, inspection costs, and developer fees.
Enter the sum of all those costs on line 1 of Form 5695.
Form 5695 also lists several other eligible home energy improvements:
- Solar water heating (line 2)
- Small wind turbines (line 3)
- Geothermal heat pumps (line 4)
- Biomass systems (line 5).
If you installed any of those in 2022, enter its cost on the appropriate line.
Then add up lines 1 through 5 and put the result on line 6a. If your solar system is the only energy credit you’re claiming, line 6a will just repeat the total cost you entered on line 1.
To calculate your tax credit, multiply the amount you just entered on line 6a by 30% and enter the result on line 6b.
Assuming you’re not claiming a credit for installing fuel cells or carrying forward any credits from last year, enter the amount from line 6b on line 13.
Step 2: Determine your tax liability
Now, you’ll determine whether you owe enough in taxes to get the full 30% credit this year or whether some of it will have to be carried over to next year.
To start, you’ll need to complete your standard 1040 form up to line 18, which will contain the amount you owe before taking any credits into account.
Go to page 4 of the instructions for form 5695, where you’ll see a worksheet to calculate what your tax liability is for the ITC after other credits are considered.
Enter your tax liability from line 18 of form 1040 on line 1 of the worksheet.
Line 2 is for listing various other kinds of credits. Assuming you aren’t taking any of them, all you’ll need to do is re-enter the amount from line 1 on line 3.
For example, if your tax liability from line 18 of form 1040 is $10,000 and you aren’t taking any of the other credits, the worksheet will look like this.
If it turns out that you are taking some of those other credits, you’ll need to first enter the amounts. Then put their sum on line 2, subtract it from line 1, and put the result on line 3.
Next, go back to form 5695 and enter the same amount on line 14.
Step 3: Calculate how much you can claim this year
At this point:
The full energy tax credit that you’re entitled to will be on Form 5695, line 13.
While your tax liability after all other credits are considered will be on line 14.
If line 13 is smaller than line 14, that means you owe enough tax to take the whole credit this year. So, you’ll enter the full credit from line 13 on line 15.
If, on the other hand, line 14 is smaller, you don’t owe enough taxes to claim the whole credit this year. So, you’ll enter the amount you can claim from line 14 on line 15.
Step 4: Add to Schedule 3
Next, go to Schedule 3 and enter the same amount on line 5.
Line 6 of Schedule 3 contains spaces for other non-refundable tax credits. If you're only claiming the ITC, skip both lines 6 and 7 and just enter the amount from line 5 on line 8.
If, on the other hand, you are claiming some of the other credits listed on line 6, enter them, put their sum on line 7, and enter the sum of lines 5 and 7 on line 8.
The next part of Schedule 3 is for refundable tax credits. If you’re not claiming any, you’re done with Schedule 3. If you are claiming some refundable credits, enter them in Part 2.
Once you’ve finished Schedule 3, make sure to attach Form 5695 before sending it in.
Step 5: Claim your credit
All that’s left is to enter your tax credit on Form 1040. Simply put the amount from Schedule 3, line 8 on line 20 of form 1040.
We’ll leave you to finish the rest of Form 1040 on your own.
Just make sure you attach Form 5695 to Schedule 3 and then attach both to your 1040 before mailing it in.