How To File the Federal Solar Tax Credit in 2018

This is a guest post from Sarah Hancock at Best Company.

One of the best incentives that comes along with a solar energy system is the solar Investment Tax Credit (ITC), which allows individuals who purchase a solar system to deduct 30 percent of the cost of the system from their federal taxes. The ITC applies to both residential and commercial solar power systems, and there is no cap on its value.

This post will walk you through how to file for the ITC step by step. However, it is recommended that you consult with a tax professional before filing to make sure you haven’t missed anything.

Necessary Forms

To file your federal solar ITC, you will need two IRS tax forms, along with their instructions:

  1. Form 1040 (this is the standard federal income tax form, but thanks to your solar energy system, you get to fill in a few extra boxes this year to reduce your tax bill)
  2. Form 5695

You will also need the receipts from your solar installation, a calculator, and a pencil.

Step 1 – Start With the 1040

Begin by filling out the Form 1040 as you typically would up until line 53.

Once you get to line 53, it’s time to switch over to Form 5695.

Step 2 – Figure Out How Much Your Solar Credit is Worth

In line 1, enter the full amount you paid for your solar energy system, including the costs associated with the materials and installation of the system. This number will likely come from the receipt your solar company provided you with. As an example, we’ll say $30,000.

If you installed a qualified solar water heater last year, enter the amount you paid for it in line 2. If you only installed a solar energy system, enter “0” in line 2. For our example, we’ll say that we only installed a solar energy system.

Skip lines 3 and 4. In line 5, add up lines 1 and 2. For our example, this would be 30,000 + 0 = 30,000.

In line 6, multiply the amount you entered in line 5 by 30%, or .30. For our example, this would be 30,000 x .30 = 9,000. This is the amount that you will get to deduct from your federal taxes.

Skip lines 7 through 11 and head down to line 12.

Step 3 – Roll Over Any Remaining Credits From Last Year’s Taxes

If you filed for a solar ITC last year and have a remainder that you can roll over, enter that amount in line 12. If this is your first year filing the ITC, enter “0” in line 12 and continue to line 13. For our example, we’ll assume it’s our first year filing.

In line 13, add up lines 6 and 12. For our example, this would be 9,000 + 0 = 9,000.

For line 14, it’s time to switch to the worksheet on page 2 of the Form 5695 instructions.

Step 4 – Figure Out If There Are Any Limitations to Your Tax Credit

In line 1 of the worksheet, enter the total amount of taxes you owe (you figured this out when you were filling out your 1040 and entered it into line 47 of that form). For our example, we’ll say this is $5,000.

In lines 2 through 9 of the worksheet, enter the amounts of other tax credits that you’re claiming. If you are not claiming any of the other tax credits listed in the worksheet, enter “0” in lines 2 through 9. For our example, we’ll assume that we are not claiming any of the other tax credits listed in the worksheet.

In line 10 of the worksheet, add up lines 2 through 9. For our example, this would equal 0.

In line 11 of the worksheet, subtract the amount in line 10 from the amount in line 1. For our example, this would be 5,000 – 0 = 5,000.

Now that we have the number in line 11 of the worksheet, it’s time to switch back to the Form 5695.

Step 5 – Figure Out How Much of the Tax Credit (If Any) You Can Roll Into Next Year’s Tax Return

In line 14 of the 5695, enter the amount from line 11 of the worksheet. In our example, it’s 5,000.

In line 15, enter the lesser number of the amounts in lines 13 and 14. If you remember from Step 3, the amount in line 13 for our example is 9,000. This means, for our example, we would enter 5,000 (the amount in line 14, and the lesser of the amounts in lines 13 and 14) in line 15.

In line 16, find the difference between line 13 and line 15 to find out if there is any credit to carry forward to next year. In our example, this would be 9,000 – 5,000 = 4,000, meaning that there is $4,000 that we don’t have a high enough tax liability to take advantage of this year, but we’ll be able to deduct that $4,000 from our federal taxes next year. Most Americans do not have a high enough tax liability to take full advantage of their solar ITC in year 1.

Once you’ve completed the Form 5695, it’s time to return back to the Form 1040.

Step 6 – Apply the Amount From Form 5695 to Form 1040

In line 53 of your 1040, enter the amount from line 15 of your 5695. In our example, this number is 5,000, which is the amount that you’ll be able to deduct from your federal taxes this year.

That’s it, you’re finished! Now go out and enjoy the benefits of your solar energy system