How to Claim the Colorado Solar Tax Credit

Colorado’s state-level income tax credit for solar energy systems has expired and is no longer available for new installations. While the direct state income tax credit is a thing of the past, homeowners in Colorado have other financial incentives available. The primary tax benefit now comes from the federal government, supplemented by state-level tax exemptions that reduce the overall cost of a solar project.

The Federal Residential Clean Energy Credit

The primary tax incentive available to Colorado homeowners is the federal Residential Clean Energy Credit. This is a dollar-for-dollar credit that reduces your federal income tax liability. To be eligible, you must own your home and the solar energy system, meaning you cannot claim the credit if you lease the system or have it installed under a power purchase agreement where a third party owns the equipment.

This federal credit is calculated as 30% of the total cost of your solar energy system, with no maximum limit. Qualifying expenses include the solar panels or shingles, inverters, mounting equipment, and energy storage batteries with a capacity of 3 kilowatt-hours or more. The costs of labor for preparation, assembly, and installation, as well as any permitting fees or inspection costs, are also includable.

The system must be new and placed in service during the tax year for which you are claiming the credit. The credit is available for any of your homes located in the United States, not just your primary residence.

Colorado’s State-Level Tax Exemptions

While Colorado no longer offers an income tax credit, it provides two tax exemptions that directly lower the cost of going solar. The first is a state sales and use tax exemption on the purchase of renewable energy equipment. This means you do not have to pay the 2.9% state sales tax on any of the components of your solar system, from the panels and inverters to the wiring and racking.

The second state-level incentive is a property tax exemption. Typically, a home improvement that increases the value of your property would also lead to a higher property tax bill. However, Colorado law exempts the value added by a residential solar energy system from your property’s assessed value for tax purposes. This allows you to benefit from the increased home value that solar panels provide without being penalized with higher annual property taxes for the life of the system.

Claiming Your Federal Credit and Realizing State Benefits

For the federal Residential Clean Energy Credit, you must file IRS Form 5695, “Residential Energy Credits,” with your annual federal income tax return, typically Form 1040. On this form, you will calculate the total cost of your system and determine the 30% credit amount. The final credit amount is then transferred to your Form 1040, where it directly reduces the total tax you owe.

It is important to keep all related documentation, such as invoices, contracts, and proof of payment, with your tax records. While you do not need to submit these documents with your return, they are necessary proof in the event of an IRS inquiry. If the credit you are entitled to is greater than your total tax liability for the year, you cannot receive the difference as a refund. However, the unused portion of the credit can be carried forward to reduce your taxes in future years for as long as the credit is in effect.

Realizing the benefits of Colorado’s tax exemptions requires no direct action from the taxpayer. The sales tax exemption should be automatically reflected in the final price when you purchase the system, as vendors are required to exclude the 2.9% state tax. Similarly, the property tax exemption is administered by local county assessors, who will exclude the value of the solar system during their regular assessment process, ensuring your property tax bill does not increase as a result of the installation.