How to Fill Out Form 5695 for Solar Panels and Claim Your Tax Credit

Installing solar panels is a significant investment, but the federal solar tax credit helps offset some of the costs. This incentive allows homeowners to deduct a portion of their solar installation expenses from their federal income taxes, making renewable energy more affordable.

To take advantage of this benefit, you’ll need to complete IRS Form 5695 correctly. Errors or missing information could delay your credit or reduce the amount you receive.

Eligibility and Requirements

To qualify, the system must be installed at a residence you own in the United States. Eligible properties include houses, condominiums, mobile homes, and houseboats that meet the IRS definition of a dwelling unit. Rental properties do not qualify unless you also use the home as a personal residence for part of the year. If installed on a second home, you can claim the credit unless the property is rented out full-time.

The system must be operational by December 31 of the tax year in which you are claiming the credit. If installation is completed after that date, the credit must be claimed in the following tax year. Only new solar energy systems qualify—used or previously installed equipment is ineligible. The system must also be purchased outright or financed with a loan. Leasing or entering into a power purchase agreement disqualifies you from claiming the credit.

Determining Qualified Expenses

Only specific costs related to a solar energy system are eligible. These include solar panels, inverters, mounting equipment, wiring, and labor costs for site preparation, installation, and permitting fees. If an electrical panel upgrade was required for the system, that expense may also qualify.

Battery storage systems qualify if they meet certain criteria. As of 2024, standalone battery storage with a capacity of at least 3 kilowatt-hours (kWh) is eligible, even if not directly connected to solar panels.

Soft costs, such as sales taxes on eligible equipment and contractor fees, can be included. However, general home improvements—such as roof repairs or structural reinforcements not directly required for the solar installation—do not qualify. If a portion of the roof was replaced solely to support the panels, only that specific portion might be eligible.

Calculating the Credit

The solar tax credit is a percentage of qualified expenses that directly reduces federal income tax liability. For systems installed in 2024, the credit remains at 30% of eligible costs. For example, if total qualified expenses are $20,000, the credit would be $6,000. The percentage is scheduled to decrease to 26% in 2033 and 22% in 2034 before expiring in 2035 unless extended by Congress.

Unlike a deduction, which lowers taxable income, this credit provides a dollar-for-dollar reduction in tax liability. However, it is nonrefundable, meaning if the credit exceeds the total tax owed for the year, the excess cannot be claimed as a refund. Instead, any unused portion can be carried forward to future tax years.

Completing Key Sections of the Form

Form 5695 calculates and claims the residential energy credit. The form begins by requiring the total cost of the solar installation, including only eligible expenses. Any costs related to non-qualifying improvements or rebates from state or utility incentives should be excluded.

Once the total qualifying amount is entered, the form guides you through determining the credit by applying the applicable percentage. For 2024, this remains at 30%, but this figure should be verified for future tax years. The calculated credit is then transferred to Schedule 3 (Form 1040), where it reduces tax liability. If multiple energy-efficient improvements were made in the same year, such as geothermal heat pumps or wind turbines, they must be combined on Form 5695 before determining the final credit amount.

Carryforward of Unused Credits

If the solar tax credit exceeds total tax liability for the year, the unused portion can be carried forward to offset taxes in future years. This benefits homeowners who owe little or no federal income tax in the installation year, allowing them to take full advantage of the credit over time.

To carry forward an unused credit, the remaining amount must be recorded on Form 5695 and transferred to the following year’s tax return. The IRS does not impose a limit on how many years the credit can be carried forward as long as the program remains in effect. However, since the credit is set to phase down after 2032, homeowners should plan accordingly to use the full benefit before reductions take effect.

Documentation for Audit Purposes

Thorough documentation is necessary in case of an IRS audit. Homeowners should retain copies of all invoices, receipts, and contracts related to the solar installation as proof of qualified expenses. Permits, inspection reports, and manufacturer certifications should also be kept.

If the system was financed, loan agreements and payment records should be maintained, particularly if interest or other charges were included in the total cost calculation. Homeowners who received state or local incentives should document these separately, as they may need to be subtracted from the federal credit calculation. Keeping these records for at least three years after claiming the credit ensures that any potential IRS inquiries can be addressed without issue.