How Does the Federal Solar Tax Credit Work?
The federal solar tax credit is a non-refundable tax credit. Tax credits are often confused with tax deductions or exemptions, but it’s important to understand the difference, as credits provide maximum savings for homeowners.
When you claim a tax credit, it reduces the total taxes you owe, dollar for dollar. For example, let’s say you owe $10,000 in taxes and qualify for a $4,500 tax credit. That means the taxes you owe are reduced to $5,500 with the claimed credit.
- $4,500 tax credit = $4,500 savings
Tax Deductions and Exemptions
Tax deductions and exemptions only reduce your taxable income, which means you save on your taxes, but not as much as you would with a tax credit. If you had a $4,500 tax deduction, it would reduce your taxable income by $4,500, which would save only you $1,080 in taxes.
- $4,500 tax deduction = $1,080 savings (assuming a 24% tax rate)
Solar Project Costs That Qualify
The federal solar tax credit covers 30% of the total solar equipment and installation cost. These include the costs of:
How to Claim Solar Tax Credits
The process to claim the federal solar tax credit is easy. You must file Form 5695 when you file your federal income taxes. The form will ask you to provide information about your solar PV system, including the cost of the system, the date it was installed, and the name of your solar installer.
The credit can only be claimed for up to the amount you owe in federal income tax liability. Your tax liability will then be reduced by that amount, offering significant cost savings for upgrading your home to a renewable energy source that will save you even more.