How to Claim the Solar Tax Credit on Your Taxes

With the growing emphasis on sustainable energy, many homeowners are turning to solar power. To encourage this shift, the U.S. government offers a Solar Tax Credit, which can significantly reduce tax liability.

Qualifying Home Solar Equipment

To claim the Solar Tax Credit, it’s important to understand what qualifies under the Internal Revenue Code (IRC) Section 25D. The credit applies to solar photovoltaic (PV) systems that convert sunlight into electricity. These systems must be installed on a residential property you own and use as a primary or secondary home, though rental properties do not qualify.

The credit encompasses more than solar panels. It includes the entire system—such as inverters, wiring, and mounting equipment—along with labor costs for preparation, installation, and connection to the home. Battery storage systems installed with solar panels also qualify, provided the battery has a capacity of at least 3 kilowatt-hours. This ensures homeowners can take advantage of the full range of components involved in their solar energy investment.

Filing Requirements

Claiming the Solar Tax Credit requires knowledge of the necessary forms, eligible expenses, and accurate calculation of the credit.

IRS Forms

To claim the credit, complete IRS Form 5695, Residential Energy Credits. This form calculates the credit amount, which is then transferred to Form 1040 to reduce tax liability. Accurate and complete information is essential to avoid delays or audits. Taxpayers should also check for updates to IRS forms or instructions.

Eligible Expenses

Eligible expenses include costs for solar panels, inverters, mounting equipment, and labor for on-site preparation, assembly, and installation. Expenses for piping or wiring to connect the system to the home also qualify. Be sure to subtract any state or local rebates or incentives from the total system cost, as the credit is based on net expenses. Maintaining detailed records of these costs is crucial for substantiating the credit claim.

Credit Calculation

The Solar Tax Credit is calculated as a percentage of eligible expenses. For systems installed in 2023, the credit rate is 30%. For example, $20,000 in eligible expenses would result in a $6,000 credit. This credit is non-refundable, meaning it can reduce your tax liability to zero but cannot generate a refund. However, any unused portion can be carried forward to future tax years.

Carryforward Provisions

The carryforward provision allows taxpayers to use any unused credit in future years. If a taxpayer is eligible for a $6,000 credit but only has a $4,000 tax liability, the remaining $2,000 can be applied to subsequent years. This flexibility ensures homeowners can fully benefit from the credit over time. Keeping accurate records of unused credit amounts and consulting a tax professional can help with strategic planning.

Documentation to Keep

Comprehensive documentation is essential when claiming the Solar Tax Credit. Retain all invoices and receipts related to system purchase and installation, organized by equipment, labor, and additional costs. These records substantiate your claim and simplify filing.

Additionally, keep contracts and agreements with your solar provider, which detail the scope of work and warranties. Retain documentation of any state or local incentives, as these impact the overall cost calculation. Proper record-keeping ensures you are prepared for any questions or audits related to your claim.