What is the Residential Energy Tax Credit (Form 5695)?
Using alternative energy sources such as solar, wind, geothermal and fuel cell technology can lower your utility bills and benefit the environment. The federal tax code makes these green energy strategies even more attractive by offering substantial tax credits for homeowners who make energy-efficient upgrades and modifications to a new or existing home.
Residential Energy Efficient Property Credit
This Residential Energy Credit allows homeowners to claim a tax credit as a reward for using qualified energy-efficient property including appliances and systems that use solar, wind, geothermal and fuel cell technology in home building and improvement projects. It is a nonrefundable credit, so you can’t get money back if the credit you qualify to claim is more than the amount of tax you owe. However, you can carry over any excess credit and use it to reduce next year’s tax bill.
It is important to check with the manufacturer, the IRS or a qualified tax accountant before claiming the credit, because only specified types of equipment and upgrades qualify. It also reduces your tax basis in the home by the amount of the credit.
You can claim this credit for your primary home or a vacation home, but you may only claim it for one home, and you may not claim it for rental property unless you live in the property during part of the year.
The Residential Energy Efficient Property Credit is being phased out. For qualified property placed in service before the last day of 2020, the credit is worth 26% of the costs to purchase and install the equipment. The credit’s value is 30% for equipment you placed in service before January 1, 2020 and it drops to 22% of costs for property placed in service in 2022.
Non-Business Energy Property Credit
This is another tax credit that can incentivize homeowners to make energy-efficient home improvements. This credit, with a lifetime maximum value of $500, has been reinstated through tax year 2020 and is available only for existing homes (not new construction) that serve as your primary home (not your vacation home). The credit has two parts:
- A tax credit for 10% of the purchase costs (not installation costs) of energy-efficient equipment that includes certain windows, doors, roofs and insulation
- A credit for some of the costs to install specific types of high-efficiency hearing and air conditioning systems, fuel stoves and water heaters
Use Form 5695 to claim either the Residential Energy Efficient Property Credit or the Non-Business Energy Property Credit. You can learn more about tax credits and incentives that reward homeowners for adopting residential energy efficiency improvements in the IRS FAQ for these credits nd through the U.S. Department of Energy’s Office of Energy Efficiency & Renewable Energy.
For information on available electric vehicle credits, please see https://www.e-file.com/faq/electric-vehicle-credit.php.