What the Form Is For

Form 5695 is the IRS tax form that lets homeowners claim valuable tax credits for making energy-saving improvements to their homes. Think of it as the government's way of rewarding you for going green. The form covers two distinct types of credits that work differently:

Part I: Residential Energy Efficient Property Credit

This is the more generous credit, allowing you to claim 26% of what you spent on major renewable energy installations like solar panels, solar water heaters, wind turbines, geothermal heat pumps, and fuel cells.

• No maximum dollar limit on most improvements (except fuel cells, which max out at $500 per half-kilowatt of capacity).
• Applies to both your main home and other U.S. residences (existing or newly constructed).

Part II: Nonbusiness Energy Property Credit

This more modest credit covers smaller efficiency improvements like insulation, energy-efficient windows and doors, furnaces, water heaters, and air conditioners.

• Credit = 10% of qualifying improvements + full cost of specific energy property (with individual caps).
• Only for your main home (existing or additions to existing homes—not new construction).
• Lifetime limit of $500 total across all tax years after 2005, with a $200 sub-limit for windows.

By completing Form 5695 and attaching it to your Form 1040, 1040-SR, or 1040-NR, you directly reduce your tax bill dollar-for-dollar—not just your taxable income.

When You’d Use It (Late/Amended Returns)

You must file Form 5695 for the tax year when the energy property was installed and placed in service—not merely when purchased.
For 2020, installations completed during 2020 should be claimed on your 2020 tax return (filed by April 15, 2021, or October 15, 2021, with extension).

Filing Late or Amending

If you forgot to claim the credit for 2020, you can amend your return using Form 1040-X within three years of the original filing deadline (until April 15, 2024 for 2020 returns).

Carryforward Situations

If your 2020 tax liability was too small to use the full Residential Energy Efficient Property Credit (Part I), the unused portion carries forward to future years until fully used (enter on line 12).

The Nonbusiness Energy Property Credit (Part II) does not carry forward.

Key Rules for 2020

Understanding these specific 2020 rules will help you determine eligibility and amounts.

Credit Percentages and Limits

• Solar, wind, geothermal: 26% credit (no dollar limit)
• Fuel cells: 26% credit, capped at $500 per 0.5 kW capacity
• Energy efficiency improvements: 10% on qualifying envelope improvements
• Equipment limits: $50 for air fans, $150 for furnaces/boilers, $300 for energy-efficient property

The 2019 Extension

The Taxpayer Certainty and Disaster Tax Relief Act of 2019 extended Part II through 2020.
Without it, this credit would have expired after 2017.

Qualifying Home Requirements

• Home must be in the U.S.
• Part I: applies to any home you own and use as a residence.
• Part II: applies only to your main home (existing or additions).

Original Use Requirement

The equipment/materials must be new—used equipment doesn’t qualify.

Product Certification

• Must meet Energy Star or IECC 2009 standards.
• Keep the manufacturer’s certification statement for records (not submitted with the return).

Subsidy Reduction Rule

If you received non-taxable utility or government rebates, subtract them from qualifying costs before calculating the credit.

Step-by-Step Filing (High Level)

Here’s how to work through Form 5695:

Step 1: Gather Your Documentation

Collect receipts, invoices, and manufacturer certifications for 2020 energy improvements. Separate Part I (renewable systems) and Part II (efficiency improvements).

Step 2: Complete Part I (Lines 1–16)

Enter renewable energy property costs (lines 1–4), multiply by 26%.
Include fuel cell limits, carryforward from 2019 (line 12), and total on line 13.

Step 3: Calculate Your Tax Liability Limit for Part I

Use the Credit Limit Worksheet to determine how much of the energy credit you can use.
The smaller of your credit or the worksheet limit goes on line 15 (Schedule 3).
Carryforward any unused portion to line 16 (next year).

Step 4: Complete Part II (Lines 17–30)

Confirm improvements qualify (main home, existing structure).
Use the Lifetime Limitation Worksheet to track the $500 cap.
Enter costs on lines 19a–19h (materials only) and 22a–22c (equipment).
Calculate the preliminary credit on lines 20–28.

Step 5: Apply the Tax Liability Limit for Part II

Use the Part II Credit Limit Worksheet. Enter the smaller value on line 30, also on Schedule 3.

Step 6: Transfer to Schedule 3

Add both credits together and report on Schedule 3 (Form 1040), line 5.

Step 7: Keep Excellent Records

Attach Form 5695 to your return and keep documentation for three years (receipts, certifications, installation proof).

Common Mistakes and How to Avoid Them

Mistake #1: Claiming Improvements to a Rental Property

Credits apply only to personal residences, not rentals. Use Schedule E for rental deductions.

Mistake #2: Exceeding the Lifetime Limit

The $500 lifetime limit applies across all years after 2005. Track cumulative totals using the worksheet.

Mistake #3: Including Labor for Part II Improvements

For Part II (insulation, windows, doors, roofs), only material costs count—no labor.
Labor is allowed for Part I and certain equipment in Part II.

Mistake #4: Not Keeping Manufacturer Certifications

You must retain documentation proving products qualify (download if lost).

Mistake #5: Claiming New Construction Under Part II

New home construction doesn’t qualify for Part II.
However, you can claim Part I credits for renewable systems installed on a new home.

Mistake #6: Forgetting Utility Rebates

Subtract non-taxable rebates from qualifying costs before claiming.

Mistake #7: Missing the Carryforward

If your Part I credit exceeds your liability, carry it forward (line 16 → line 12 next year).

What Happens After You File

Immediate Impact on Your Tax Bill

The credit directly reduces your tax liability dollar-for-dollar.
Refunds increase accordingly if you’ve overpaid.

IRS Processing

• E-filed returns: typically processed within 21 days.
• Paper returns: 6–8 weeks or longer.

Potential for Additional Review

Returns may be flagged if:

• Credit amount seems high relative to income
• Lifetime limit issues arise
• Installation dates conflict
• Costs appear excessive

If reviewed, respond promptly with receipts, certifications, and proof of payment.

Tracking for Future Years

The IRS tracks cumulative Part II credits and expects consistent carryforward reporting for Part I.

Adjusting Your Home’s Basis

Reduce your home’s tax basis by the credit amount claimed (prevents double benefit upon sale).

FAQs

Q1: Can I claim the credit for energy improvements to my rental property?

No. Credits apply only to personal residences. Improvements to rental property are claimed as business deductions on Schedule E.

Q2: I installed solar panels in December 2020 but they were connected in January 2021. Which year do I claim?

Claim it in 2021, when the system was placed in service (operational), not when purchased or paid for.

Q3: My spouse and I file separately. Can we both claim energy credits?

Yes, each spouse can claim based on their share of payments and apply individual lifetime limits.
Filing jointly is often simpler and may yield higher combined credits.

Q4: How do I know if I’ve hit the $500 lifetime limit?

Complete the Lifetime Limitation Worksheet in the Form 5695 instructions to total prior claims (2006–2019).
The limit applies only to Part II, not Part I.

Q5: My HOA installed solar panels and I paid my share. Can I claim the credit?

Yes. You can claim your proportionate share of qualifying costs when the HOA installs energy property.
Keep documentation showing your share and installation details.

Q6: What if my Part I credit exceeds my taxes owed?

The Part I credit is nonrefundable, but unused amounts carry forward indefinitely.
Enter the carryforward on next year’s Form 5695, line 12.

Q7: My utility gave me a rebate—does this affect my credit?

Yes. Subtract non-taxable rebates from qualifying costs before calculating the credit.
If the rebate was taxable, you can include the full amount.

Additional Resources

• IRS Form 5695 (2020)
• Form 5695 Instructions (2020)
• IRS Forms and Publications

This summary is for informational purposes and reflects 2020 tax law.
Tax rules change frequently — consult official IRS instructions or a qualified tax professional for personalized guidance.