Home solar tax credit: How to claim it (Form 5695)
The form to claim the 30% federal solar tax credit is two pages long and can be a little confusing. Here's a cheat sheet for residential tax filers.
If you installed a home solar system last year, this might be one of the few times when you’re eager to file your taxes.
That’s because the tax credit is worth 30% of the total price of your home solar installation. Most home solar installations are between 4 kW and 10 kW in size. The national median price of an installation is $3.80 per watt, which means that most installations will cost at least $15,000 before incentives. 30% of that is a nice chunk of money, so making sure that you claim this credit correctly is important.
If you’re not familiar with this credit, which is also (somewhat incorrectly) known as the solar ITC, be sure to read my article. (Note that this article is focused on residential tax filers: the credit for businesses is different and uses Form 3468.)
To claim the tax credit, you’ll fill out Form 5695. There are lengthy instructions the IRS publishes. You should read them, but this article is a cheat sheet that will help you decipher their rather dense language.
A special note if you have batteries, as more and more people do: the Inflation Reduction Act formally recognized home battery storage as a technology eligible for this credit. Form 5695 hasn’t been updated yet to recognize this, so see my note at the bottom of this article for more details.
What is the federal tax credit for home solar?
For homeowners, the Residential Energy Credits are tax deductions you can take for your expenses on solar energy and other green energy improvements you’ve made to your home. Here’s a list of things that qualify:
- solar photovoltaic (electric) panels
- solar thermal panels (for hot water and heating)
- small wind turbines
- geothermal heat pumps (if you’re interested in air-source heat pumps, scroll to the bottom of this article for details)
- biomass heating (eg. wood burning) units with at least 75% efficiency
- home storage batteries
The tax credit also applies to hydrogen fuel cells, but that’s a “unicorn” technology that doesn’t really exist for homes yet, except in extremely limited cases.
There’s a second part of the tax credit that gives you 10% off the cost of home energy efficiency improvements such as insulation, energy efficient windows and doors, and energy efficient water heaters.
Who can claim the tax credit?
You can claim the tax credit if you own the solar panels (or other equipment you’re claiming). This includes financing in the form of a loan, but it does not include leases or power purchase agreements.
If you paid cash, or obtained a loan from the installer or a bank, you can claim the credit because you are the owner of the system. When you use a lease or PPA to get your solar panels installed, you can’t claim this credit because the solar installer owns the panels. This is one of the reasons why leases are a bad idea for most consumers.
For solar, geothermal, and wind technologies, you can claim the credit for an installation on any home you own. This means you can claim it for your primary home or a rental or vacation property.
Line 1: Qualified solar electric property costs
This is where you enter the total price of your home solar system. Whatever the “bottom line” price you paid your installer is what goes here.
If you finance your system through the installer, you cannot claim any interest payments or loan origination fees related the loan. Figuring this exact amount can be tricky because of the opaque nature of dealer fees, so be sure to ask your installer about this.
Here’s some clarifying language published by energy.gov:
If you financed the system through the seller of the system and you are contractually obligated to pay the full cost of the system, you can claim the federal solar tax credit based on the full cost of the system. Miscellaneous expenses, including interest owed on financing, origination fees, and extended warranty expenses are not eligible expenses when calculating your tax credit.
Lines 2-5: Solar hot water, wind, geothermal, and biomass
Use these lines to claim the cost of solar hot water, small wind, geothermal, or biomass heating equipment. While these technologies are less common than solar electric panels, they’re still quite widely used.
Solar hot water is deployed on many homes in the United States, but an important detail is that only hot water used for home consumption qualifies for this credit. This means that if you’re using solar thermal panels to heat hot water for your swimming pool or hot tub, you can’t claim this credit. Even though replacing natural gas with solar for these purposes would be better for the environment, I guess the IRS sees pools and hot tubs as luxury items.
Geothermal heat pumps are much less common than air-source heat pumps, but are a highly efficient technology for heating your home. If you pair them with solar panels, you can heat your house with solar and possibly even go net zero.
While biomass can mean different fuels, for practical purposes it means heating your home with wood. The appliance must be at least 75% efficient to qualify. This often means a wood pellet stove, which are generally more efficient than fireplace inserts, although some inserts do meet the 75% requirement. Often the stove will be advertised as “EPA Approved” if it qualifies. You can also look up the EPA’s database of wood stoves to find out if your model qualifies.
Lines 6a and 6b: Add everything up and take 30%
If you’re reading this article, you probably only have an entry on Line 1 so far. In any case, total up everything from Lines 1-5 and put that on 6a.
Multiply that by 0.30 and enter it on Line 6b. That’s your 30% tax credit.
Lines 7-11: Ignore them
Unless you’re one of the very few homes with unicorn hydrogen fuel cell technology, ignore these lines.
Line 12: Carryover credit from previous years
Because this tax credit might be quite large, it’s possible that you won’t be able to use all of it in one year. Remember that this is a credit rather than a rebate. This means you can only use it to reduce the taxes you owe. The IRS doesn’t pay it out to you as a lump sum.
Fortunately, if you can’t use all of your credit this year, you can bank the remainder and use it next year. The IRS doesn’t specify a limit to the number of years you can do this, so you can assume that you can carry it forward until it’s all used. (Be sure to check with your tax professional first.)
If you have credits to carry over from last year, enter them on Line 12.
Line 13: Add up your credits
Add Line 6b (this year’s new credits) and Line 12 (any credits you are carrying forward from last year), and enter the result on Line 13. We’re ignoring Line 11 because that’s for fuel cells.
Line 14: Figure out how big a credit you can take this year
This line is a little more complicated because you have to add up other deductions you’re taking, such as credits for child care expenses, mortgage interest, and the purchase of an electric vehicle, but it’s really quite simple.
Make sure that you’ve calculated all the other credits you’re taking this year. Once you’ve done that, use the worksheet to help you add them all up.
Once you’ve completed the worksheet, enter the final number on Line 14.
Lines 15 and 16: The credit you can take this year
Figure out if Line 13 or 14 is smaller, then enter that smaller number on Line 15. That’s the residential energy credit you can take this year.
If you have more residential energy credit than you can use this year (ie. Line 15 is less than 13), enter the unused remainder on Line 16. Keep a note of this and make sure you claim it next year!
Part 2: Energy Efficient Home Improvement Credit
The second part of the form is used if you’re claiming a credit for energy efficiency improvements to your home, such as insulation, ENERGY STAR windows and doors, heat pump hot water heaters, and even cool roof technology.
How to fill out that section of the form is outside the scope of this article, but I will share the eligibility criteria for windows, doors, and skylights. The IRS says that they must meet the Energy Star 6.0 standard, but they don’t actually tell you what that means.
The document detailing the 6.0 standard can be found on the energystar.gov website (PDF).
What about batteries?
This tax credit was originally written back when it looked like hydrogen was going to be the next big thing, and before lithium ion batteries exploded onto the market. While the IRS has said that in their view home storage batteries do qualify for the credit, the form has never been updated to reflect that fact.
Now, with the passage of the Inflation Reduction Act of 2022, batteries are explicitly recognized as a qualifying technology.
In a previous note, the IRS said that batteries only qualify if they are charged only by solar energy. That language does not exist in the IRA, which means that you can buy a standalone battery (without solar panels), charge that battery using grid electricity, and still qualify for the credit.
The only stipulation now is that the battery must have a capacity of at least 3 kilowatt-hours (kWh) to qualify. All the major lithium batteries aimed at the home market, such as the Enphase IQ and Generac PWRcell, meet this requirement.
At the time of writing, the language in Form 5695 and the accompanying instructions have not been updated to reflect the inclusion of batteries for this credit. In the past, tax filers have claimed this expense on Line 1, alongside their solar PV system expense. If the form hasn’t been updated by the time you do your taxes, that’s probably still the correct thing to do, but check with your tax professional.
Air-source heat pumps will benefit, but will be point-of-sale rebates
While the Residential Energy Credits section of this tax credit is for ground-source heat pumps, air-source heat pumps are far more common. (I’ve got one myself.)
The Form 5695 under the Energy Efficient Home Improvement Credit allows homeowners to claim a relatively small $300 tax credit for an ENERGY STAR rated air-source heat pump.
The IRA allocated additional money for rebates for air-source heat pumps, but the exact details have yet to be worked out. It does appear that it will be a point-of-sale rebate, which means that you will get the discount up front when you purchase the system. It won’t be a tax credit that you apply for.
I’ll keep an eye out for this and update this article when the details come out.
References
- White House FAQ on the clean energy credits in the IRA
- IRS FAQ (pdf) on the residential clean energy property credits
- IRA Form 5695 (form and instructions)
