2023 Form 5695

I just recently installed a roof-mounted Solar panel system on my home, and I am aware that by filing form 5695, I am entitled to a 30% federal tax credit of the total cost, parts and labor.

I observed when filling out Form 5695's Energy Credit Limit Worksheet, my taxable amount before the credit is less than double the credit. The worksheet computed that my tax due cannot be less than the amount of the credit, which applies if the credit is more than half the tax due without the credit. In this case, the worksheet limits the 2023 credit to the tax due before the credit, minus the credit, which is less than the credit.

For example if the tax before credit due is $33,000 and the credit is $18,000, the worksheet indicates my 2023 credit is limited to $15,000 ($33,000 minus $18000), then the remainder of the credit is applied to the 2024 return as a credit carryover. I have been withholding to this target.

However, my tax software, FreeTaxUSA 2023 edition just came out, and it is allowing me to claim the entire credit in 2023.

Any explanation for the discrepancy?

I've been curious about this, and hoping a tax professional would weigh in, but it's been five days so I'll take a crack at it. Please understand that I am not a tax professional, just an interested taxpayer who has filed form 5695 for a couple of years now -- via FreeTaxUSA also, as it happens.

TL;DR version: I don't think you're reading the 2022 instructions correctly. (The 2023 form and instructions aren't on the IRS website yet.)

Form 5695:

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5695 instructions:

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RCEC = Residential Clean Energy Credit, front of Form 5695 (Your solar panels fall in the RCEC.) EEHIC = Energy Efficient Home Improvement Credit, back of Form 5695

These two separate credits are on one form, which is a little confusing IMHO. This year's allowed RCEC (line 15) _plus_ the allowed EEHIC (line 30) flow into Form 1040 Schedule 3, line 5.

The worksheet you're referring to is on page 4 of the instructions. As you know, the RCEC is a nonrefundable credit, and nonrefundable credits can't reduce your total tax liability below zero. So the worksheet has you compute a limit on the Residential Clean Energy Credit for that tax year. That limit goes on line 14 of form 5695, your credit up to that limit goes on line 15 (and form 1040), and the excess credit (if any) goes on line 16 for carryforward to next year.

But here's what I think you misread: The worksheet on page 4 of the instructions does not use the RCEC (line 13). It uses the EEHIC (line

30). Your solar panels are part of the RCEC, so that credit is _not_ subtracted from the available credit this year.

If you don't have any EEHIC (back of Form 5695), then nothing from Form 5695 goes on the page 4 worksheet that is used to compute the limitation of the RCEC (front of Form 5695). If you do have an EEHIC, it will reduce how much of the RCEC you can claim this year, but any excess in the RCEC just carries forward to next year.