How to claim the Federal 30% tax credit for installing solar with update for 2018

Congratulations, you have a tax credit of $5,652.00!  That’s the average investment tax credit consumers will receive in 2018 for installing eligible solar (PV) panels in their home. The Bipartisan Budget Act of 2018, signed into law on February 9th, 2018 by President Trump reinstated the Investment Tax Credit (ITC) for solar photovoltaic systems. It was originally created by The Energy Policy Act of 2005 and remains one of the most generous public incentives ever offered to consumers.

The ITC allows consumers to receive a 30% tax credit off the entire purchase price of solar-electric systems that were installed and placed in service by December 31, 2017. According to the U.S. Department of Energy, the average cost of a solar-electric PV system in 2018 is $18,840, earning consumers a whopping $5,652 tax credit. But if you don’t claim it, you will lose it. So here is how to claim your 30% Federal tax credit for installing solar in your home:

Step 1 – Do I Qualify for the solar energy Investment Tax Credit?

Taxpayers qualify for the investment tax credit for solar-electric systems they purchase and have installed on eligible property that they own and use as their main residence. An eligible property includes a home, houseboat, mobile home, condominium and manufactured homes that meet Federal Manufactured Home Construction and Safety Standards.

Your solar system must have been installed or placed into service after January 1st,2006.

Step 2 – Complete Your Form 1040

In order to take advantage of the investment tax credit, you must file an itemized tax return using IRS Form 1040 or Form 1040NR. You might find it easier to complete the Residential Energy Credits Worksheet (Form 5695) if you get started on Form 1040 and complete lines 1-47 first. You will need to calculate your tax liability and enter it on Form 1040 Line 47.

It is important to note that your tax credit cannot exceed your tax liability. However, you can carry-over any unused tax credits to reduce your tax liability on next year’s tax return.

Step 3 – Complete Form 5695 (Residential Energy Credits)

You will need to complete both Form 5695 and Parts I and II of the accompanying worksheet. These forms may look complicated, but its actually very easy to complete. We’ll take it one line at a time.

Step 4 – Complete lines 1 thru 5 on Form 5695

First, you will enter the total cost of installing your solar-electric system on line 1. For example, if your system cost (purchase plus installation) is $18,840, you will enter that amount. By the way, if you also installed a solar water heater or geothermal heat pump you can add in those costs too on lines 2 thru 4.  Then add up lines 1 thru 4 and enter that total on line 5.

Step 5 – Complete lines 6 thru 8

Second, since you can only claim a 30% tax credit, you will multiply the amount on line 5 by .3 and enter that amount on line 6. In our example, the amount is $5,652 ($18,840 x .30).

Step 6 – Complete lines 9 thru 13

Next, enter any additional solar energy costs you may have for solar water heater and/or geothermal pumps on the appropriate line, if any. Otherwise, enter the total amount of lines 6, 11 and 12 on line 13. This is the total amount of your Residential Energy Credits.

Step 7 – Calculate your tax savings

To calculate your tax savings, enter the amount of your tax liability from your Form 1040, line 47 on line 1 of Form 5695 Residential Energy Credit Worksheet.

Then, enter the amount of your Residential Energy Credits from Line 13 of Form 5695 to line 14 of the worksheet.

Next, on line 15 of the worksheet you are going to enter the smaller of the two amounts from line 13 or line 14 of the worksheet. For example, if your tax liability is $3,500 and your energy credit is $5,652, enter $3,500. You will also enter this amount on Form 1040, line 53. This will reduce your current tax liability to zero. Don’t forget to include Form 5695 when you file your tax return.

Step 8 – Carry-over unused residential solar energy credits

Finally, subtract the amount on line 15 from line 13 of the worksheet and enter the difference on line 16. In our example above, we would enter $2,100 ($5,652 – 3500). This is the leftover energy credit that can be carried over to your next tax return.