Can You Carry Over Solar Tax Credit to Future Years?
Learn how the solar tax credit works, its nonrefundable nature, and how to carry over unused credits to future tax years with proper recordkeeping.
The federal solar tax credit, officially known as the Investment Tax Credit (ITC), helps reduce the cost of installing a solar energy system by allowing homeowners and businesses to deduct a percentage of their installation expenses from their federal taxes. This incentive has played a significant role in increasing the adoption of renewable energy. Understanding how to maximize its benefits ensures taxpayers make the most of their investment.
Nonrefundable Classification
The federal solar tax credit is nonrefundable, meaning it can reduce tax liability to zero but does not generate a refund if the credit exceeds the amount owed. Unlike refundable credits, which can result in a cash refund, a nonrefundable credit is limited by total tax liability for the year.
For example, if a taxpayer owes $3,000 in federal taxes and qualifies for a $5,000 solar tax credit, only $3,000 can be applied to eliminate the tax bill. The remaining $2,000 cannot be refunded but can be carried forward to future tax years.
Claiming the Credit
To claim the solar tax credit, taxpayers must file IRS Form 5695, which calculates the total credit based on eligible installation costs, including solar panels, inverters, wiring, labor, and permitting fees. The final credit amount is then transferred to Schedule 3 (Form 1040) to reduce tax liability.
Only system owners can claim the credit. Those who lease solar panels or enter into power purchase agreements (PPAs) do not qualify. The system must be installed on a primary or secondary U.S. residence and placed in service within the tax year being filed. The IRS defines “placed in service” as the point when the system is operational and generating electricity, typically confirmed by a final inspection or utility approval.
Timing matters. If a system is purchased in December but not activated until January of the following year, the credit applies to the later tax year. Taxpayers should keep documentation such as receipts, manufacturer certifications, and utility interconnection agreements to substantiate their claim in case of an audit.
Carryover of Unused Credits
If the solar tax credit exceeds a taxpayer’s federal tax liability for the year, the unused portion carries forward to future years. Current tax law allows an indefinite carryforward, ensuring the full credit can be used as long as it remains in effect.
Strategic tax planning helps maximize the benefit. Since the credit applies after deductions and other credits, taxpayers with fluctuating income should consider their future tax liability. Someone expecting higher earnings in the coming years may benefit more from applying the credit later when their tax obligation is greater. Those nearing retirement should use as much of the credit as possible before their taxable income declines. Consulting a tax professional can help determine the best approach.
Recordkeeping Essentials
Maintaining thorough documentation ensures the solar tax credit is properly claimed and retained in case of an IRS audit. Taxpayers must provide records verifying eligibility and credit amounts, including itemized invoices, proof of payment, and a breakdown of costs to distinguish between eligible and ineligible expenses.
Only certain components qualify, such as photovoltaic panels, inverters, and mounting equipment. Manufacturer certification statements confirm the equipment meets tax credit requirements. Copies of local permits and utility interconnection agreements further support the claim by proving the system was installed and operational within the applicable tax year.
Adjusting Past Filings
Taxpayers who failed to claim the solar tax credit in the year their system was installed can amend prior tax returns using Form 1040-X. This is useful for those who were unaware of the credit at the time of filing or miscalculated their eligibility. The IRS generally allows amendments within three years of the original filing deadline.
An amended return must include a revised Form 5695 reflecting the correct credit amount and supporting documentation. Processing can take several months, so taxpayers should anticipate delays. If the correction results in a carryforward of unused credits, adjustments may be needed in subsequent tax years to ensure full utilization. Consulting a tax professional can help navigate the amendment process.