How to Deduct a Home Solar System on Your Taxes

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You’re always keeping a watchful eye out for ways to reduce your annual taxes. So, you’re probably wondering about tax credits for solar panels and how they work. The federal government program, called the federal solar tax credit, also known as the solar investment tax credit (ITC), allows qualifying homeowners to deduct 26% of the total cost to install a solar power system on their federal taxes. It’s vital that you understand how this credit works, qualifications to use it, and how to claim it on your taxes.

Brief History of Solar Tax Credits

The federal solar investment tax credit was established by the Energy Policy Act of 2005. Originally set to expire in 2007, the tax credit has been so popular at promoting residential solar installations, Congress has extended its expiration date many times, with the current expiration date of 2023. Homeowners who would like to install a solar system in later years may be able to take advantage of the ITC, but there is no guarantee that it will be extended.

How It Works

Solar projects that started construction in 2021 are eligible for the 26% federal tax credit. The solar tax credit is a reduction in your tax liability, based on the cost of the solar system. The solar credit is nonrefundable, which means it cannot result in a refund if your tax credit exceeds your tax liability. For example, if you owe $2,000 in taxes and your tax credit is $2,500, then the amount owed will be subtracted from the tax credit. The remaining balance of $500 will be credited toward your taxes in the following year. If you don’t have a tax liability or took advantage of the federal solar tax credit in prior years, you can’t claim it again.

How to Claim It

If you’re eligible for the federal solar tax credit and want to claim it, you need to file IRS Form 5695 with your taxes. Part 1 of the form helps you calculate the credit which is then listed on your 1040 form. You should first consult with a tax professional to ensure that you’re eligible for the tax credit.

Call Cool Blew Solar

The solar system tax credit is one of the best ways to save money on your energy bills and taxes. Want to learn more? Call your greater Phoenix solar experts at Cool Blew Solar today at 623-234-2836. We’re available every day of the year, 24 hours a day.