Guide to IRS Form 5695: How to Claim the Federal Solar Tax Credit
Note: The information below can be used if filing taxes in 2020 for a solar installation that was placed into service in 2019. Updated information for 2020 taxes to be filed in 2021 will be available when the IRS introduces form 5695 for 2020.
It’s that time of year again—tax time! But this year is different, because this was the year you installed solar panels on your home (or qualifying property), and now you’re ready to get that big fat tax credit to take 26% right off the top of that expense. And we’re here to help guide you through the process!
And hey—if you’re reading this and haven’t yet installed solar, you only have a couple more years to get this sweet tax credit. 26% off the cost until the end of 2022, or 22% in 2023. That’s nothing to scoff at people, but the tax credit won’t be around after that… so what are you waiting for?
We’ve included an example below of how to fill out the tax forms, and we’ve also included a section at the bottom of this post that answers some frequently asked questions about the process of claiming the credit.
We’ve prepared two posts to answer all your solar tax credit questions. If you're interested in general information of the solar tax credit then you should go here. If you're looking for information on how to claim your tax credit then you're already in the right place.
KEEP IN MIND: We are solar guys, not tax guys. We do not give tax advice, and anything you read on this page is merely one example of how someone might act. Please consult a tax professional before filing.
Now then, let’s get down to it.
What you need to claim the tax credit
- The receipts for your solar installation
- IRS Form 1040 for 2019 (PDF Link)
- IRS Form 5695 for 2019 (PDF Link)
- Instructions for both those forms
- A pencil
- Some snacks to keep your energy up… something not too greasy, though… wouldn’t want to smudge the forms… pretzels are always a nice choice
- Some water, maybe, if your mouth gets dry from the pretzels
- A calculator
Fill out your Form 1040 as you normally would. Stop when you get down to line 13b, and move to Form 5695. Write or type your name in the space provided.
How to fill out Form 5695
We chose “Example Exampleson,” who hails from my home state of Minnesota, dontcha know. He spent $18,600 to install a 6.2-kW solar panel system on his home, and entered that number in line 1 below:
So what’s a qualified solar electric property cost? Here’s what the instructions for Form 5695 say:
Include any labor costs properly allocable to the onsite preparation, assembly, or original installation of the residential energy efficient property and for piping or wiring to interconnect such property to the home.
Qualified solar electric property costs are costs for property that uses solar energy to generate electricity for use in your home located in the United States. No costs relating to a solar panel or other property installed as a roof (or portion thereof) will fail to qualify solely because the property constitutes a structural component of the structure on which it is installed. The home does not have to be your main home.
All that is a fancy way of saying “Pretty much any cost related to installation and materials counts. Claim it.” Next, unless you also installed solar water heating equipment or a geothermal heat pump, move on to line 5. Follow the instructions to complete lines 5, 6, and 7:
Skip to line 12 unless you installed fuel cell property (huh?), and enter in any credit you’re carrying over from a qualified energy property installation (like a previous solar installation) from the previous year. Then fill in line 13 with the total amount of credit from lines 6, 11, and 12. In Mr. Exampleson’s case, he has no prior-year credit to add, so he just puts the same $5,580 from line 6:
Form 5695 Line 14 Worksheet – Reducing the credit
Line 14 is where it gets tricky. The thing about the solar tax credit is it isn’t “fully refundable,” meaning you can only take a credit for what you would have owed in taxes. This is different than other, fully refundable tax credits like the Child Tax Credit and the Health Coverage Tax Credit.
That’s why you use the worksheet below. You enter the total tax you owe before credits in line 1 of the worksheet, and the amounts of any fully refundable credits on lines 2 through 8.
Add up the total credits on line 9 and subtract to get your total tax liability. That number goes on line 10 of the worksheet and line 14 of Form 5695.
Luckily, you can carry over the unused credit to the next tax year, so if you can’t claim the whole credit on your 2019 taxes, you get to reduce your 2020 tax bill by whatever’s left over. A tax liability calculation worksheet is provided in the instructions for Form 5695. Here’s what it looks like for our friend, who has a total tax liability (listed on line 1 and line 11 below) of $4,600 this year:
Because Mr. Exampleson only owes $4,600 in taxes this year, that’s all the credit he can take now. He enters that number on lines 14 and 15 of Form 5695, and then enters $980, the difference between his total credit ($5,580) and the credit he can take this year ($4,600), into line 16.
Finally, he enters the amount from line 15 on Form 5695 into the box on line 5 of Schedule 3.
That’s it! Mr Exampleson owes $0 taxes this year, and will get a further credit of $980 on his 2020 tax return. He may also qualify for refundable tax credits on the second part of Schedule 3. Now, check out the tax credit FAQ below. If you have any other questions, please enter them in the comments!
Frequent Form 5695 Questions and Considerations
Q: I got a rebate from my utility company for my solar panels. Do I calculate the 26% tax credit before or after the reduction from the rebate?
A: We get this question all the time, and here’s the best answer: You calculate the 26% federal tax credit based on the cost to you AFTER any rebates. For example, if your system cost $20,000 and you get a $5,000 rebate from the utility, your federal tax credit would be 26% of $15,000, or $3,900. Here’s the tricky part: if your state ALSO gives you a tax credit, you don’t need to worry about that amount to calculate your federal credit. Both state and federal tax credits are calculated based on the amount you paid, minus rebates or grants.
Q: If I installed a solar panel system a few years ago and now I want to add new panels, can I claim the credit?
A: Yes! You can claim the credit for any new costs associated with the addition. You can’t go back and claim the credit for the previously-installed equipment. Hopefully you already claimed the credit for those costs back then.
Q: If I install solar and claim the tax credit, will I have to repay the credit to the government if I sell the house within a certain number of years?
A: No! If you install a solar panel system on a home you own, you can claim the whole credit and sell at any point after. Keep in mind this is only true for homeowners. The law is significantly more complex for commercial solar installations.
Q: Can I get a tax credit if I install solar panels on rental property I own?
A: If the property is a rental only, you cannot claim the tax credit. HOWEVER, if you own the property and maintain it as a residence for a certain portion of the year (i.e., you rent it out while you’re away), you can claim the credit for the portion of the year you spend there. For example, if you install $20,000 worth of solar panels on a home in Florida that you live in from November 1st to May 1st, and you rent that home during the summer, you are entitled to take 50% of the possible tax credit, or $3,000 (26% of $20,000 is $5,200, and 50% of that is $2,600).
Q: I just had a quote from a solar company. They informed me I needed a new roof to hold the solar array. Can I get 26% back off the roof and the solar, as it was an additional cost?
A: Let’s be clear again that we’re not tax experts, but it looks like the answer is yes. Early in this article, we quoted the instructions for Form 5695. Here that is again:
No costs relating to a solar panel or other property installed as a roof (or portion thereof) will fail to qualify solely because the property constitutes a structural component of the structure on which it is installed.
What it looks like that sentence is saying is: a roof that is built to be able to hold a solar array counts as a structural component, and therefore counts as a cost of the project. Thanks, IRS!
Q: Should I claim the tax credit if I partially paid (e.g., a deposit) in 2021 for an installation that won’t be completed until 2022?
A: No, the instructions for Form 5695 say “Costs are treated as being paid when the original installation of the item is completed,” so you can claim all the costs for your installation no matter when they were paid, but you have to wait to claim them in the year the installation takes place. Keep receipts!
Author: Ben Zientara | Solar Policy Analyst and Researcher
Ben is a writer, researcher, and data analysis expert who has worked for clients in the sustainability, public administration, and clean energy sectors.