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How to File IRS Form 5695 to Claim your Solar Tax Credits

By: Eric Huesca, SEO Content Writer
June 22, 2023

Investing in a solar energy system is not just an eco-friendly choice, but a financially savvy one as well, thanks to government incentives like the federal solar tax credit. However, to take advantage of these incentives, you must navigate the IRS’s paperwork, including filing Form 5695. This article aims to guide you through the process of completing and filing this form accurately to claim your solar tax credits. 

IRS Form 5695

IRS Form 5695 up-close.

Understanding the Federal Solar Tax Credit

The Federal Solar Tax Credit, also known as the Investment Tax Credit (ITC), allows homeowners and businesses to deduct a portion of their solar installation costs from their federal taxes. The ITC currently covers a significant percentage of the system cost, and this incentive can significantly decrease the payback period of your solar investment, this can also help with knowing how many solar panels you want to get before getting solar panels installed. 

Who is Eligible for the Solar Tax Credit?

Both homeowners and commercial business owners who have installed solar panel systems can claim the 30% federal solar tax credit. However, there are specific eligibility criteria that one needs to meet, such as owning the solar system (rather than leasing it) and having sufficient taxable income against which to claim the credit. 

Understanding the IRS Form 5695

Form 5695, “Residential Energy Credits,” is the tax document you’ll need to fill out to claim your solar tax credits. This form calculates tax credits for a variety of residential energy improvements, including solar energy systems. 

Part I of 5695 tax form is reserved for the solar electric property costs, while Part II is for other types of energy-efficient improvements. To claim the credit for your solar energy system, you’ll need to complete Part I. 

Filling Out Form 5695

Filling out Form 5695instructions involves a series of steps that involve calculating the total cost of your solar energy system, determining the amount of credit you’re eligible for, and incorporating this into your overall tax return. 

The form requires you to detail your solar energy expenses, including installation and equipment costs. Next, you’ll multiply these costs by the tax credit rate to calculate the total credit amount. 

For example, if you installed a solar system costing $20,000 and the current ITC rate is 30%, you would enter $20,000 in line 1, then multiply it by 30% (0.30) to get $6,000. This is the tax credit you can claim for the year the solar system was put into service. 

Carrying Over the Solar Tax Credit

One of the key benefits of the federal solar tax credit is the ability to carry over the credit to future tax years if you cannot claim the full amount in the installation year. This is helpful if the tax credit exceeds your tax liability as you can only claim a credit up to the amount you owe in taxes in a given year. 

If you have any remaining credit, you can include this amount on line 13 of Form 5695 and carry it forward to offset your taxes in future years. 

Filing Your Federal Tax Return

After completing Form 5695, you will need to incorporate the credit into your overall tax return. This involves transferring the amount from Form 5695 to the appropriate line of Schedule 3 (Form 1040 or 1040-SR) that pertains to credit for residential energy. 

Final Words

Understanding how to complete and file IRS Form 5695 to claim your solar tax credits can help you leverage the financial benefits of your solar investment. While the process may seem complex, it’s a manageable task when broken down step-by-step. 

However, everyone’s tax situation is unique, and it may be beneficial to consult with a tax professional when preparing to claim your solar tax credit. This will ensure accuracy and maximization of your tax benefits, driving your solar investment further. 

Remember, the sun doesn’t just power your home; it also powers your financial savings in the form of solar tax credits. So don’t let IRS Form 5695 intimidate you. With a little guidance and patience, you’ll be well on your way to claiming the solar tax credits you deserve. 

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Copyright © 2022 Solgen Power, All Rights Reserved