A Quick Guide To IRS Form 5695
As you likely know, the Federal Solar Tax Credit was extended until 2035, making it more feasible for homeowners to install solar panels and reap the benefits.
A tax credit decreases the amount owed in taxes for homeowners with adequate tax liability. In order to claim this and other solar credits and incentives, homeowners will need to properly fill out Form 5695. As an installer, you should be able to provide the information clients need to fill out this form – although we do recommend against giving any tax advice to clients. Direct them to a tax professional if they have questions on their eligibility or specific situation.
We’ll talk through what Form 5695 entails so you can help clients understand what they need to do to claim various solar incentives.
Overview Of The Federal Solar Tax Credit
Taxpayers might be familiar with the federal solar tax credit, which is now also known as the Residential Clean Energy credit. In short, eligible homeowners who install solar panels on their home through the year 2034 can get a substantial federal tax credit.
Through 2032, homeowners may qualify for a 30% tax credit. The credit goes down to 26% in 2033, to 22% in 2034 and then phases out completely in 2035.
Remember that these tax credits are not a deduction or refund. They are a one-to-one reduction in the taxes you owe. If a client’s tax liability is less than the value of the tax credit, they may be able to carry the remaining balance over to another tax year. Again, encourage them to reach out to a tax professional for more assistance.
What Is Form 5695 For Residential Energy Credits?
Form 5695 is the paperwork clients can file with their income taxes to take advantage of financial incentives to go green. The Form 5695 worksheet is for calculating and claiming non-business energy property credits or residential energy-efficient property credits.
This form isn’t limited to the solar tax credit: It also applies to other renewable energy upgrades such as geothermal heat pumps, wind turbines, fuel cells, solar water heating systems, biomass and many other alternative energy devices.
How To Fill Out Form 5695 For Solar Panels
The most important step in filling out Form 5695 is to confirm eligibility. Luckily the form provides a checklist to help homeowners determine which of their green home improvements are eligible for the tax credit.
To get the correct tax credit, clients will need the following information:
The gross cost of the solar panel system – panels, racking, inverters, labor and permitting. The gross amount is what was spent, minus other cash rebates, state tax credits or incentives received.
If the solar installation required other home upgrades such as a new electrical panel, clients may also be able to add them to the costs. Installers should be able to provide this inclusive system cost.
They’ll also need to enter information on Page 4 to calculate the limit of tax credits they’re able to claim. Be prepared by gathering information about expenses related to:
Adopting a child
Buying a battery-electric vehicle (BEV) or plug-in hybrid electric vehicle (PHEV)
Buying a home for the first time
What Other Energy-Efficiency Upgrades Can Taxpayers Claim On Form 5695?
Form 5695 isn’t just for solar. Other upgrades might also qualify:
ENERGY STAR® certified appliances such as natural gas, propane hot water builders and furnaces
Insulation (installation costs are not included)
Roofing materials (installation costs are not included)
If more clean energy upgrades were added to the home in previous years but the client wasn’t able to claim the full value of the credit, they may be able to claim the carry-over credit. A tax professional can advise clients on the best move for their situation.
In addition to these upgrades included in the form, let’s briefly examine a few of the other programs available.
The Energy Efficient Home Improvement Credit
In 2022, the Nonbusiness Energy Efficient Property credit was expanded and renamed. It’s now known as the Energy Efficient Home Improvement credit. The earlier benefits remain in place for 2022 and the enhanced benefits will be in place from 2023 to 2032.
Nonbusiness Energy Efficient Property Credit: For expenses incurred in 2022, this is a 10% credit with a maximum lifetime credit of $500 for most items except doors, where the lifetime cap is $200. Eligible costs include installation and purchase costs of energy-efficient HVAC, water heaters and biomass stoves. The credit covers purchase prices of energy-saving doors, windows, skylights, insulation and certain roofing materials, but not the installation costs.
Energy Efficient Home Improvement Credit: For upgrades made in 2023 or later, the credit increases to 30%. The limit has increased from a lifetime $500 limit to $1,200 per year through 2032.
FAQs: Using IRS Form 5695 For The Clean Energy Tax Credit
Here are a few questions homeowners might have about IRS Form 5695.
Who fills out Form 5695?
Homeowners who have made clean energy upgrades to their home should fill out IRS Form 5695 to help them claim the tax credit for these upgrades.
What is the energy tax credit for 2022?
When U.S. lawmakers passed the Inflation Reduction Act of 2022, they raised the amount of the tax credit to 30% of the total cost of the renewable energy upgrades until 2032. It was previously scheduled to be 23% before expiring in 2024.
How do homeowners access Form 5695?
The Internal Revenue Service (IRS) has Form 5695 available online, along with instructions for providing all the information.
What other home efficiency upgrades can be claimed on Form 5695?
Many upgrades might qualify, including the purchase and installation of efficient water heaters, air conditioning units and small wind energy units.
The Bottom Line: Form 5695 Is Essential For Getting The Federal Solar Tax Credit
Solar panel systems have a high up-front cost, so filling out IRS Form 5695 is critical to shortening clients’ payback period. If homeowners run into difficulties completing the form, recommend that they consider getting help from a qualified tax professional.