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Federal Solar Tax Credit in 2020
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Solar PV system is a costly investment. The outright cost of an average home installation ranges from $16,500 to $21,500, which is quite a sum. The good news is that you can save about $5,000 if you buy and have your system installed till the end of 2020. Read this article to learn some facts about the Solar Tax Credit and how to benefit from it in 2020.

What is the Federal Solar Tax Credit?

The Solar Investment Tax Credit (ITC) was first introduced in the USA by the Energy Policy Act of 2005. To encourage Americans to use solar power, Congress proposed a solar panel tax credit worth 30% of the total solar installation cost (parts and labor), which basically meant a dollar-for-dollar reduction in the amount of income tax owed by the homeowner. For example, if the solar PV system cost $15,000, you could claim a $4,500 federal tax credit back then, which would reduce your federal income taxes due by $4,500 respectively. Easy!

Thanks to its popularity and significant contribution to renewable energy development, the ITC has been extended multiple times since it was enacted in 2006. The US solar industry has grown by more than 10,000% to reach 71.3 gigawatts of solar installed capacity (as of the end of 2019), creating nearly a quarter-million new jobs and investing billions of dollars in the economy of the country. Despite the tremendous success of the Federal Solar Tax Credit, its value started decreasing dramatically in 2019.

All good things must come to an end?

Riding on the wave of its success, Congress has extended the solar ITC program till 2022. However, starting in 2020, the value of the rebate will fall for three years until it finally ends for residential solar and permanently drops to 10 percent for commercial solar in 2022.

Typically your bill will contain the information on the amount of energy (kWh) used during the billing period, as well as per day (kWh/day). The utility bill above shows that the daily consumption in September was 76 kWh. Let's assume that it is the average energy usage for this utility customer and take it as a basis for our further calculations. We are going to size a grid-tied system, just because it is a way more popular with homeowners than an off-grid one.
is the last chance to claim the ITC for residential solar PV system
In July 2019, nearly 1,000 solar energy companies sent a letter to Congress, urging it to extend the Federal Tax Credit program for solar energy projects. There have also been a number of Senators favoring further solar energy development. Unfortunately, things are complicated by the current presidential administration, which has been antagonistic to clean energy. This is what makes the possibility of the ITC extension far from certain.

How does the Federal Solar Tax Credit work in 2020?

Despite such a depressing forecast, you still have a little time to benefit from the federal incentive. Let's have a look at how the ITC works in 2020.

This year a 26% credit is applicable to both residential and commercial systems, which must be placed in service during the tax year (2020). In fact, there is no bright-line test from the IRS on what constitutes 'placed in service', but the IRS has equated it with completed installation.

There is no maximum amount that can be claimed, so don't worry if your tax liability is lower than your solar rebate – the credit can rollover to the next year. For example, if you solar system cost $20,000 before the tax credit, you are eligible for $5,200 (26% of the total gross cost) in tax credit. If your annual tax liability is $4,000, you won't pay any taxes in 2020 and will owe $1,200 less in 2021 ($2,800). If your tax liability in 2020 is $6,000, you will get a full credit the same year and will owe just $800.
If you forgot to claim your ITC last year, contact a tax professional asap to amend your tax return.

The more you spend, the more you save

Solar PV system isn't only about buying solar panels. It comprises a range of auxiliary equipment and services, which will make you constantly dip into your pocket. All these expenses can be claimed, including:
  • Solar equipment
  • Freight shipping costs
  • Solar consulting fees
  • Professional installer fees
  • Electrician fees
  • Engineer fees
  • Tools bought or rented
  • Wiring, screws, bolts, nails, etc.
  • Equipment purchased or rented (scaffolding or a man-lift, for example)
  • Permitting fees
  • Permitting service costs
As you can see, there are a lot of things to take into account. So, do keep all your receipts from the very beginning of your solar installation project. Like any tax incentive, the Federal Solar Tax Credit requires a paper trail. Don't worry, this paper work won't be in vain: the more solar-related expenses you can prove, the larger your credit will be.

Owner? Here's your tax credit

Generally, the majority of solar system owners are eligible to claim the ITC. The key word here is owner: It is crucial that you own the solar PV system (i.e., you purchased it with cash or through financing but you are neither leasing nor are in an arrangement to purchase electricity produced by a system you do not own).

Here are some other facts regarding the Federal Tax Credit eligibility:
  • The solar PV system must be located at your primary or secondary residence in the USA.
  • You must have any tax liability.
  • The solar PV system must be new or used for the first time. The credit can only be claimed on the 'original installation' of the solar equipment.
  • Solar system for RV or boat must be accepted by the IRS as a second home.
Remember, every individual's tax situation is different. Consult a tax professional to make sure you're eligible to claim the Federal Tax Credit.

How to get a Solar Tax Credit: Form 5695 is at your service

Once you've installed your solar PV system, collected all the receipts and confirmed you're eligible, it's the time to do some paperwork. In fact, there aren't many forms to fill in: you'll need to complete IRS Form 5695 and add your solar energy credit information to your typical Form 1040.
Form 5695 calculates tax credits for a number of qualified residential energy improvements, including solar PV systems. We are going to walk you through the form step by step to show how easy it is to handle.
Line 1: Calculate your solar electric property costs. Don't forget to include auxiliary equipment costs, as well as installation fees. Make sure you can prove all purchases and expenses included in the total costs.
Lines 2-4: If no other energy improvements have been made, write 0.
Line 5: With lines 2-4 empty, write the same number you have on line 1.
Line 6: Multiply line 5 by 26% (the value of the solar tax credit for 2020).
Note: this is the 2019 form, that is why the ITC was 30%
Lines 7-11: If you have no fuel cell property installed, tick 'No' and skip lines 7b-11.
Line 12: Since you have just installed your solar PV system, you carryforward no credits from last year.
Line 13: Put the value from line 6 on line 13.
Before going further, you need to calculate if you are going to have enough tax liability to get the full 26% credit in one year. To do that, complete the Residential Energy Efficient Property Credit Limit Worksheet on page 4 of the Instructions for Form 5695. If you are claiming tax credits for adoption expenses, interest on a mortgage, or buying a plug-in hybrid or electric vehicle, you will need that information here.
Note: the numbers
Once you're done with the credit limit worksheet, go back to form 5695.
Line 14: Enter the result from line 11 of the credit limit worksheet on line 14 of Form 5695.
Line 15: Review line 13 and line 14, and put the smaller of the two values on line 15.
Line 16: In this example, the tax liability is bigger than the tax credits, so the taxpayer will be able to get the full 26% credit in one year. If this is your case, write 0 on line 16. If the tax liability is smaller than the tax credits, subtract line 15 from line 13, and enter it on line 16. That's the amount you can claim on next year's taxes.
Now add your solar tax credit to Schedule 3/Form 1040.
The value on line 15 is the amount that will be credited on your taxes in 2020. Enter that value into Schedule 3 (Form 1040 or 1040-SR), line 5:
Congrats! You've done it!
Remember to include Form 5695 when you submit your taxes to the IRS. Commercial systems have similar guidelines as residential ones, but use IRS Tax Form 3468.
If you did energy efficiency improvements to your home in the same year, you may also need to complete page 2 of Form 5695.
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