How Does The Solar Tax Credit Work if I Don’t Owe Taxes? Limitations and Verifications

Georgette Kilgore headshot, wearing 8 Billion Trees shirt with forest in the background.Written by Georgette Kilgore

Solar Panels | March 29, 2024

Couple standing outside their home solar panel installation wonders how does the solar tax credit work if i don't owe taxes and what are solar panel tax credit limitations for irs tax refund and how does irs verify solar credit using form 5695?

The solar tax credit is excellent news for homeowners, but with the U.S. tax code, understanding how it works can be tricky and many people ask, how does the solar tax credit work if I don’t owe taxes?

With any tax credit, there are limitations and conditions for approval and verification.

This incentive has been a game changer for homeowners because, finally, you get to save a lot of money on solar installation. If you are aware of how pricey investing in solar farms or home installation is, you understand why this topic is so exciting.

Not only is it a chance to adopt cleaner energy for your home, but it is a great way to put your tax credit to good use.

Yet, there is a lot of misinformation about the residential energy credit.

This guide explains the answer to the question, how does the solar tax credit work if I don’t owe taxes, and provides key resources for ensuring that you get the tax breaks you earned by installing solar panels at home.

The History of Solar Installation Tax Credit

The solar installation tax credit (ITC) could not come at a better time than this when governments are realizing that clean energy is the future.

Solar Panel in the farm.

(Image: Igor Savin / Игорь Савин13)

The idea first came to light in 2005 when President Bush was in power, but the rules and regulations were a bit different from what we know today as the residential energy credit.

Back then, the law was passed that there was going to be a 30% credit on solar system installation, but there was a problem. There was a $2000 limit on the cost.

This was a step back In the efforts towards achieving carbon neutrality, and according to further legislation, something had to be done.

When President Obama took office in 2007, it was a dream come true for homeowners because it meant that the cap was removed, allowing the incentive to work better for the people.

Graphic representation of the solar investment federal tax credit timeline that started from 2005 when ITC is created, 2006 when ITC is implemented, 2007 when ITC was extended, 2008 when ITC extended and expanded, 2015, when ITC extended, 2022 another extension of ITC have been passed, and it is projected that on 2035 ITC will expire until renewed by Congress.

At last, solar panel installation in the majority of homes in the US is no longer a pipe dream. You have a better shot at converting to solar, and the best part is that you will be improving the clean energy sector.

What Is a Tax Credit?

Simply put, the tax credit is a reduction In how much taxes you owe, dollar-for-dollar. It means that claiming a $1000 tax credit reduces the income tax you owe by the same amount.

The credit gives you a great chance to deduct a certain amount of money from the tax you owe the government, and by so doing, your tax burden is lifted, and your tax liability reduces.5

Tax credits are once exceptional incentives where the state allows the citizens to pay their debts, this is welcome news because it eases a lot of the burden off the taxpayer.

These incentives are specially created for individuals, groups, and organizations to help the government further its agendas, like, for instance, supporting the shift to clean solar energy.

However, this is not to be confused with tax deductions. Tax credit helps you reduce how much taxes you owe the government,6 whereas a tax deduction helps reduce your taxable income, and the amount will entirely rely on the rate of your tax.

What Is a Tax Liability?

Now that you understand what a tax credit is, another important concept to know is tax liability. For starters, you know that taxes are crucial because it is the only way for the government to fund public services.

These taxes are tailored in different ways and come in various forms to guarantee that everyone has a role to play.

Therefore, virtually every working citizen owes the government; this amount the government requires from you is now simply called tax liability.

This is the amount of money that you owe your local government, state, or IRS. There are a number of ways that you can have a tax liability.

What contributes to the amount include salaries, wages, and money you receive after selling an asset, just to name a few.

In the same light, the reverse is also true because if you are unemployed or don’t have an income, it goes without saying that you don’t owe the government any taxes.

In short, you don’t have a tax liability, which becomes a tricky spot if you are eligible to get a tax credit. It makes you wonder, then, how does the solar tax credit work if I don’t owe taxes?

Is it possible to receive credit from the government without the liability to place it?

What Is the Solar Panel Tax Credit and What Does It Cover?

There is no simpler way to put it than this; the federal solar tax credit allows the taxpayer to reduce the solar system cost by 30% against their tax liability.

You get 30% off of your installation cost and, in return, reduce the amount of taxes that you owe the government, dollar-for-dollar.

It is also commonly known as the Residential Clean Energy Credit and is not to be confused with getting a discount on the solar system.7

During purchase, you must finance the system in person, either with cash up front or using a solar loan, and only afterward can you apply for the tax credit next time you are filing your taxes.

To put it more in perspective, imagine that the system will set you back $30 000. You will pay for it in full, then claim the tax credit when filing your taxes.

30% of $30 000 is exactly $9 000, which now becomes your tax credit. If the amount you get is more than what you owe the government, all that is left carries over to the next tax season.

Eligibility for the Residential Energy Credit

Who wouldn’t jump at the thought that they can get solar installation against their tax credit, and at a great rate of 30%, for that matter?

To make it even more enticing, there are no limits to what you cannot include in the Residential Clean Energy Tax Credit, from the batteries, cables, panels, and labor costs, to the inspection.3

Basically, the tax credit covers anything and everything, as long as it is up to 30% of the total cost of the system.

Graphic representation of the eligibility requirements for the residential energy credit such as installation period, the system should be installed in a residential property within the country, new or first-time used PV system, and ownership is required, no leased or contracted systems.

Before you get all excited about the entire thing, note that there is an eligibility criterion that will easily shut you out unless you meet everything on the list.

  • The installation process must have happened between the first of January 2022 and to 31st of December 2032
  • The system must have been installed in your residential property within the country
  • The PV system has to be a new installation or must have been installed and used for the first time
  • You must be the rightful owner of the solar system; the credit doesn’t apply to leased equipment or other solar purchasing contracts

What Does the Form 5695 Do?

When you are done with the lengthy process of purchasing and installing the PV system, the next stop is the filing for the solar tax credit of the year, in the same way, you would file your taxes.

Form 5695 is a mandatory requirement to obtain the credit, and you want to fill it in very accurately.

Screenshot of the Form 5695 about Residential Energy Credits.

(Image: Department of the Treasury Internal Revenue Service14)

The form from the IRS is the surest way to help you calculate the tax credit on the first part, after which you enter the results on 1040.

The most important thing to remember is that if in the previous year, you had a higher credit than your tax liability, then there is no way to use the credit to get the money back.

The only option would be to carry over the unused credit to the next tax period because it all relies entirely on your tax liability.

What Are the Solar Tax Credit Amounts?

The time to adopt residential solar energy is now. You will be thrilled that the tax credit has been extended all the way to 2034, and this is the time to strike instead of waiting for the perfect timing.

It is even more attractive now that the government has come on board and introduced solar tax credit, allowing you as a dutiful taxpayer to get more than 30% off your solar installation through your tax liability.

The reason why you are urged to do it now is that the rate is not constant, and the incentive keeps changing based on the year of installation and when you place the system in service.

For example, if you bought your PV system between 2017-2019, you are supposed to get 30% off the system cost.1

On the other hand, the rate went lower for the period 2020-2021 because the incentive stood at 26% of the equipment.

The best part is that it is currently at 30% from 2022 all through 2032, which is the perfect time to cash in on it and apply Form 5695 before it dips again to 22% in 2034.8

If you are unsure of whether to take the leap or not, remember to do it as soon as possible when the rates are still attractive.

How Does the Solar Tax Credit Work if I Don’t Owe Taxes?

It is now time to answer the most important question from countless taxpayers, how does the solar tax credit work if I don’t owe taxes?

As stated earlier, your tax liability is how much money you owe the government and the IRS, and it is the basis on which you can receive your tax credit.

The only problem comes when you have a fixed income or earn little or no money. Retirees, the unemployed, and other people with very minimal tax liabilities have the same questions on their minds, are they eligible for the tax incentive?

The unfortunate news is that the main purpose of tax incentives is that they help in reducing the amount of taxes that you owe.

Therefore, little or no taxes means that there is nothing for the government to work with, and you will sadly have to miss out on the benefits of incentives.

You may not be able to fully utilize the tax credits from the state, but it doesn’t mean that investing in a solar farm or solar panels for residential properties isn’t worth it.

Solar panel on the roof of the house.

(Image: Olivia Martin, U.S. Department of Energy12)

It is the ultimate way to reduce your utility bills if you have often complained that they were too high for you or that your household had extremely high energy requirements.

Net metering will also come in handy to help offset the high cost lastly, and probably the most important advantage is that using solar power is cleaner and more sustainable, not only for this but for the coming generations.

Besides, according to solar farm income per acre calculations, starting a solar farm is the fastest and most lucrative investment, estimated to only go up in the coming few years.

You don’t have to fret about how does the solar tax credit work if I don’t owe taxes, because there are other excellent financing options like PPAs and leasing.

Can the Solar Tax Credit Combined With Other Incentives?

The solar tax credit is not the one and only way to help you finance the pricey solar panel installation costs.

If you are not eligible to apply for a tax credit, there are several other power-purchasing agreements that you can enter into to secure affordable loans.

Your next question now would be, what if I qualify for the government incentive? Can I still get access to other financing options? The direct answer is a big yes.

It is easy and cheaper to combine the tax credit with other incentives from your state, county, or utility provider.4

For instance, some states are more mindful of their residents and have come up with special additional tax credits which can be used on top of the country’s 30% rate.

The states in question are New York,9 Texas, and Arizona, which have a 25% tax credit. You can do a deep dive online to determine whether your state also has that.

But sadly, your search for Colorado solar tax credit will show that the state currently doesn’t offer any rebates to its citizens, and you only have the state’s tax credits to count on.

Since installation can cause an arm a leg, your last resort will be to add other financing options on top of the federal solar tax credit to make the system more affordable.

How Does IRS Verify Solar Credit and How Does the Solar Tax Credit Work if I Don’t Owe Taxes?

If you are all in when it comes to the process, you may wonder how the verification works and how the IRS can be able to determine and confirm your tax credit.

The IRS has an elaborate and accurate way to tell whether you are eligible for solar credits, this is all thanks to Form 5695.

When you get to their website and ask for the form, you will receive very clear, stepwise instructions on how to go.

The one and only challenge is when you don’t owe taxes because there is no other way for the solar tax credit to work.

Here is what the IRS expects from you in the process of filling out the application.

  1. You will first bring to light exactly how much money you spent on the entire solar system.
  2. The next step is to highlight what else you have done to your home to improve its efficient use of energy. This will be in regard to your use of generators that are powered by the wind, the use of solar heating methods, or the adoption of geothermal heat pumps.
  3. After that, you should be able to tell how much credit you can qualify for.
  4. Next, put down the value of the tax credit.
  5. Another important step is determining how much your tax liability is from your taxable income.
  6. You will also be required to enter the highest value of the tax credit you can get.
  7. Also, don’t forget to calculate how much credit you need to carry over, but only if that is a must.

Is the Solar Tax Credit a One-Time Credit?

Before you deep dive into the application procedure, which means a little more paperwork for the next time you are filing your taxes, you may be keen on whether there are any limits.

Screenshot that shows the solar energy systems tax credit.

(Image: Energy Star15)

It is understandable to ask because several applications directly imply more reduction on your taxes, but is that how it works?

Technically, the solar tax credit goes to the funding of the PV system for one taxpayer and one house. Therefore, it is not in question whether you can do it twice because it is impossible.

If not, you could easily do it several times per tax season and won’t have to pay a dime for the installation.

As enticing as that sounds, it is, unfortunately, not how things run at the IRS or the rebates program.

The closest you can get to applying multiple times is when you have several residential properties, all of which you have installed solar power for.

Another exception is only when you have some credits rolled over to the next year. Even in that case, it doesn’t mean that the rollover can take place forever; the IRS gives you a cap of five years, after which you can no longer cash in your credits.

But still, the entire process can be quite confusing, and you would rather consult a professional for advice.10

How Many Times Can You Claim Solar Tax Credit?

Purely based on how the incentive was framed, you can only claim solar credit once for each of your properties for which you have installed solar power.

The bad news is that you cannot repeatedly claim the credit, which would virtually eliminate all the installation costs.

Luckily, if you have more properties, each with PV systems, you are allowed to apply more than once.

The only exception where you can get credits for more than one tax season is when some credits roll over to the next year. But still, there is no way this can happen for more than five years.

Solar Credit Carryforward: How Many Years IRS Allows

Literally, every taxpayer has a different situation when it comes to matters of taxation rates and tax credits.

Therefore, it is common to find situations where your solar tax credit for the year is not equivalent to the total amount you qualify for.

In such exceptional services, what the IRS does is that it carries forward the amount to the next tax year. Whatever is left over will be deducted from the tax liability of the next season, which is quite fair if you ask.

Still, this cannot happen for long; soon enough, your tax deducted should match up to the solar tax credit.

The IRS allows it to go on for less than five years, which in reality, should be the time frame within which the rebate should be completely paid off.

What Is the Solar Tax Credit Income Limit?

Onto more exciting news for you as a potential residential solar system owner. Did you know that there are no credit income limits hindering you from obtaining solar credits? Simply put, any taxpayer, regardless of their income bracket, can comfortably apply for the incentive.

There is no minimum or maximum amount you can get off your tax as long as you are employed and taxed by the government.

The only key takeaway is that the higher your tax liability, the more tax credits you are eligible for.

This also answers the question how does the solar tax credit work if I don’t owe taxes. There is no way to deduct money that doesn’t exist, and sadly, no tax liability and no solar tax incentives for you.

How Does Solar Tax Credit Work if I Get a Refund?

IRS tax refund is allowed on some tax credits because they come in two forms,11 refundable and non-refundable.

Screenshot about the details of tax refund.

(Image: Department of the Treasury Internal Revenue Service11)

The refund advantage would come in handy if you could get a payback off the money left over in your credits, but unfortunately, the IRS has a different idea.

If you didn’t know yet, you should know that the clean energy tax credit is not refundable. So, if your tax liability doesn’t level up to what is required, you will not receive the full credit.

You can go for other financing options then that will not care about your tax liability. Solar leasing has proven workable over the years, and other homeowners take up loans for financing.

The only problem is that none of these third-party options work like solar tax incentives. You will have to service the loans for a long time which can take a toll on you.

Still, their advantage over the tax incentives is that the latter requires that you pay for the system in full first, install it, then apply for rebates later.

What happens when you don’t have the cash upfront? You may still have to apply for a solar loan after all.

How Does the Federal Solar Tax Credit Work?

The solar tax credit system is a pretty simple idea. The state offers taxpayers a 30% tax reduction on the total cost of solar panel installation.

This means that whatever it costs to set up the system will be deducted from the total amount you owe the government in taxes.

How Do You Know if You Are Eligible for Solar Tax Credit 2023?

You can qualify for a solar tax incentive as long as you follow the IRS’s laid-out procedures. To be able to receive the tax credit, the solar system should be solely in your possession and must have been installed on the property you own.

The installed system must also be brand new, not second-hand or borrowed.

How Does the Solar Tax Credit Work if I Don’t Owe Taxes?

In a rather ironic twist, not owing the government money is a terrible thing. Not having a tax liability means that you automatically do not qualify for a solar tax credit.

The system is uniquely designed to allow a certain amount of tax reduction, and that cannot happen if you don’t have any tax liability, to begin with.

How Does the Solar Tax Credit Work if I Don’t Owe Taxes? Can Anyone Benefit From It?

By now, it should be clear that not everyone can fully benefit from solar tax credits. As a homeowner who has installed the PV system, you would think that you are automatically eligible for the incentive, but sorry to break it to you, but there are several guidelines to meet first.

The first and most important is that you need to owe taxes or have a tax liability against which the incentive will be based.

It will be impossible to get if you are unemployed or already got your refund check, meaning you won’t be owing anything from which the money will be deducted.2

It is understandable if the entire concept of tax liability deduction is still not clear to you because there are a lot involved and several processes to deal with before you get the credits.

The best call if you don’t want to mess everything up is to bring in a tax expert to take you through the guidelines and the application process.

The government is working tirelessly to see that more people adopt clean energy, and it shows with the solar tax credit system.

If you have never before used any of the government’s rebates programs, you will be thrilled at how great the system works.

Well, it starts with you installing a working solar PV system on your residential property. The government then rewards you by giving you back 30% of the money you used for the entire process.

No, you don’t get a check refund; instead, the state deducts the same amount out of the amount of taxes you owe.

Unfortunately, this can never work unless you owe the government some money in the form of unpaid taxes. If you don’t owe them anything, there is no way to receive the rebates.

Understanding the answer to th equestion, how does the solar tax credit work if I don’t owe taxes, is just the first step…de-connecting from grid power and reducing your emissions can save you tons in the long run.

Frequently Asked Questions About How Does the Solar Tax Credit Work if I Don’t Owe Taxes?

What Was the Federal Solar Tax Credit 2022 Income Limit?

The best news for taxpayers is that there is no income limit for one to be eligible for the solar tax credit. Anyone within any tax bracket can apply and qualify for the tax reduction as long as they have a tax liability and have not received a refund.


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