Solar Tax Credit – Filing Your 2016 Taxes with the ITC

We chose an example who spent $25,000 to install a 8 kW solar 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 from the previous year.

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 $7,500 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. 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 2016 taxes, you get to reduce your 2017 tax bill, too. A tax liability calculation worksheet is provided in the instructions for Form 5695. Here’s what it looks like (keep in mind, this is a draft copy of the instructions, but it probably won’t change):

Looks like the example only owes $4,600 in taxes this year, meaning that’s all the credit he can take now. He enters that on lines 14 and 15, and then enters $2,900, the difference between his total credit ($7,500) 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 53 of Form 1040.

That’s it! This example owes $0 taxes this year, and will get a further credit of $2,900 on his 2017 tax return. Now, check out the tax credit FAQ button. If you have any other questions, contact us!