How to Claim the Solar Panel Tax Credit

Installing solar panels is a financial commitment for a homeowner that brings benefits for energy independence and utility savings. A financial consideration involves navigating the tax implications of such an investment. Federal, state, and local tax codes contain provisions that can alter the final cost of a solar energy system. The tax incentives are not automatic and require homeowners to meet defined criteria to realize the full financial benefit.

The Residential Clean Energy Credit

The federal tax incentive for homeowners is the Residential Clean Energy Credit. This credit allows you to subtract a percentage of the total cost of your solar installation directly from the federal income taxes you owe. For systems placed in service between 2022 and 2032, the credit amount is 30% of the total cost. This rate is scheduled to decrease to 26% for systems installed in 2033 and 22% in 2034 before being phased out.

To be eligible, you must own the solar energy system, meaning it cannot be leased. The system must be new and installed at a home you use as a residence in the United States; this can be your primary or secondary home. The credit is not available to landlords or property owners who do not live in the home where the system is installed. There is no income limit for this credit, and there is no maximum credit amount you can claim.

Qualified expenses are comprehensive and include the cost of equipment and installation labor. Costs for structural home improvements, such as replacing your roof, are not includable, even if done in preparation for the solar installation. Qualified expenses include:

• Solar panels or cells
• Power inverters, wiring, and mounting equipment
• Labor costs for onsite preparation, assembly, and original installation
• Battery storage technology with a capacity of 3 kilowatt-hours or more

The credit is nonrefundable, which means it can reduce your tax liability to zero, but you will not receive any of it back as a refund beyond that amount. If the credit you are entitled to is more than the taxes you owe in a given year, you can carry the unused portion forward to apply to your taxes in subsequent years.

Required Information and Forms for the Credit

To claim the Residential Clean Energy Credit, you must gather documentation to substantiate your expenses. The most important documents are the final, paid invoices and the purchase contract from your solar installer. These records should itemize the costs of all components and associated labor, showing a total gross cost for the system.

With your cost documentation in hand, the next step is to obtain the correct tax form. The credit is claimed using IRS Form 5695, Residential Energy Credits. It is important to download the most current version of this form from the IRS website. For a solar installation, you will focus on Part I, which is specifically for the Residential Clean Energy Credit.

Completing Part I of Form 5695 requires you to transfer the cost information from your invoices. On line 1, you will enter the total qualified solar electric property costs, which includes the equipment and installation labor. If you also installed qualifying battery storage, you will enter those costs on line 5b.

Filing for the Federal Credit

You officially claim the Residential Clean Energy Credit when you file your annual federal income tax return. You must submit Form 5695 along with your standard Form 1040. Tax preparation software will typically handle this automatically, prompting you for the relevant cost details and generating the completed form.

This is accomplished by transferring the total credit amount from Form 5695 to Schedule 3 (Form 1040), “Additional Credits and Payments.” The figure is entered on line 5, where it is combined with other nonrefundable credits. This transfer ensures the credit is properly applied against the tax you owe.

State and Local Tax Implications

Beyond the federal credit, homeowners may find additional tax benefits at the state and local levels. One of the most common incentives is a property tax exemption. Normally, a home improvement like a solar panel system would increase the assessed value of your home and your property tax bills. However, many jurisdictions have laws that exclude the added value of a renewable energy system from your property’s valuation.

The duration and specifics of these exemptions vary widely; some last for a set number of years, while others may be permanent. To claim this benefit, homeowners often need to file a specific application with their local tax assessor’s office, providing documentation about the system and its cost.

Another incentive offered in some areas is a sales tax exemption. This benefit eliminates the state and local sales tax on the purchase of the solar equipment, which can lower the upfront cost of the system. The availability and rules for both property and sales tax exemptions are determined by state and local governments, so it is necessary to research the regulations in your area.