Making your home more energy-efficient can save you money twice: once on your utility bills, and again on your taxes. Form 5695 helps you claim federal tax credits for qualifying energy improvements you made in 2018. This guide explains everything you need to know in plain English.

What Form 5695 Is For

Form 5695 allows homeowners to claim two distinct federal tax credits for energy-saving improvements made to their U.S. homes in 2018:

The Residential Energy Efficient Property Credit (Part I)

This offers a generous 30% credit for renewable energy installations, including solar panels, solar water heaters, small wind turbines, geothermal heat pumps, and fuel cell systems.
This credit applies to both existing homes and new construction, and there's no dollar limit on most systems (fuel cells are capped at $500 per half-kilowatt of capacity).

Example: If you install a $20,000 solar panel system, you could receive a $6,000 tax credit.

The Nonbusiness Energy Property Credit (Part II)

This covers more traditional energy-efficiency improvements like insulation, energy-efficient windows and doors, high-efficiency heating and cooling systems, and water heaters.

• Limited to a lifetime maximum of $500 across all tax years after 2005
• Specific caps apply:
  • $200 for windows
  • $300 for certain heating systems
  • $150 for furnaces
  • $50 for circulating fans

This credit was initially expired at the end of 2017 but was retroactively extended to cover 2018 and 2019 by the Taxpayer Certainty and Disaster Tax Relief Act of 2019.

Both credits apply only to your home in the United States—whether it's a house, condo, manufactured home, or even a houseboat where you live.

When You’d Use Form 5695 (Late/Amended Filing)

Most taxpayers who want to claim the Part II credit for 2018 will need to file an amended return using Form 1040-X, because the credit wasn’t available when 2018 tax returns were originally due.

Congress extended this credit after most people had already filed their 2018 taxes.

If you made qualifying improvements in 2018 and haven’t claimed the credit yet, you can still do so by amending your return.

Amended Return Deadlines

You generally have three years from the date you filed your original return (or two years from when you paid the tax) to amend and claim a refund.
For most 2018 filers, this deadline has passed (around April 2022), but if you filed an extension or had special circumstances, verify your specific deadline.

If You Claimed Part I

The Part I renewable energy credit was available when 2018 taxes were originally filed.
If you only claimed that credit, you likely filed it with your original return.
However, if you discovered qualifying expenses later or made an error, use Form 1040-X to correct it.

Key Rules for 2018

Understanding these essential rules will help you avoid mistakes and maximize your credit.

Main Home Requirement

• Part II credit (windows, insulation, etc.) applies only to your main home.
• Part I credit (solar, wind, geothermal) can apply to any U.S. home you own, not just your main residence.

Existing Home vs. New Construction

• Part II applies only to existing homes or additions.
• You cannot claim it for a brand-new home.
• Part I does allow credits for new construction.

Lifetime Limits

• If you’ve claimed $500 or more in Part II credits since 2006, you can’t claim more in 2018.
• Specific sub-limits:
  • $200 for windows (lifetime)
• Check your total across all prior years before claiming.

Basis Reduction

When you claim these credits, you must reduce your home’s tax basis by the credit amount.
This affects your capital gains if you sell the home later.

Subsidies Must Be Subtracted

If you received rebates or subsidies not included in taxable income, subtract them from your qualifying costs before calculating the credit.

Example:
If solar panels cost $20,000 but you received a $2,000 rebate, your qualifying cost is $18,000.

Labor Costs Included

• Part I: Labor costs for installation, wiring, and piping count.
• Part II: Labor costs don’t count for insulation, windows, or doors—but do for furnaces and water heaters.

Manufacturer Certification

You can rely on the manufacturer’s written certification that a product qualifies.
Keep this documentation with your tax records (don’t attach it to your return).

Step-by-Step (High Level)

Here’s how to complete Form 5695 for 2018:

Step 1: Gather Your Documentation

Collect receipts, invoices, and manufacturer certifications.
Include itemized costs showing equipment, labor, and any rebates received.

Step 2: Determine Which Credits Apply

Decide whether your improvements fall under Part I (renewable energy) or Part II (energy-efficiency).
Check if you’ve exceeded lifetime limits.

Step 3: Complete Part I (Renewable Energy)

Enter costs for solar electric, solar water heating, wind energy, and geothermal systems.
Fuel cells have a $500 per half-kilowatt cap.
The form calculates 30% of your qualifying costs.
You can carry forward unused credits.

Step 4: Complete Part II (Energy Efficiency)

Confirm improvements were made to your main, existing home in the U.S.
Add up prior-year Part II credits to check your lifetime limit.
Enter costs by category (insulation, doors, windows, HVAC, etc.) following the specific caps.

Step 5: Calculate Your Final Credit

The form will determine your allowable credit based on limits and tax liability.
Unused Part I credits can carry forward to 2019.

Step 6: Attach to Your Tax Return

Attach Form 5695 to your Form 1040 or 1040-NR.
For amended returns, attach it to Form 1040-X.

Common Mistakes and How to Avoid Them

Mistake #1: Claiming Part II for New Construction

Problem: Claiming credits for new homes.
Solution: Only claim Part I renewable energy systems.

Mistake #2: Forgetting Prior Years’ Credits

Problem: Exceeding the $500 lifetime limit.
Solution: Add up all previous Form 5695 credits from 2006 onward.

Mistake #3: Exceeding Per-Item Caps

Problem: Ignoring sub-limits ($200 windows, $300 HVAC, etc.).
Solution: Track each category separately.

Mistake #4: Including Non-Qualifying Labor Costs

Problem: Counting installation labor for insulation/windows.
Solution: Only include material costs for those items.

Mistake #5: Not Reducing for Rebates

Problem: Forgetting to deduct non-taxable rebates or subsidies.
Solution: Subtract those before entering costs.

Mistake #6: Assuming All “Energy Star” Products Qualify

Problem: Assuming Energy Star = qualified.
Solution: Verify with manufacturer certification.

What Happens After You File

Credit Processing

• IRS processes Form 5695 with your return.
• Expect normal refund times:
  • 21 days (e-file)
  • 6–8 weeks (paper)
• Amended returns may take 16+ weeks.

Record Retention

Keep documentation for three years after filing: receipts, certifications, and rebate proof.

Carryforward Tracking

If unused Part I credit remains, carry it forward to 2019 and record it properly.

Home Basis Adjustment

Reduce your home’s tax basis by the credit claimed (e.g., $300,000 – $6,000 = $294,000).

IRS Verification

IRS may request proof for large credits; respond with receipts and certifications promptly.

FAQs

Q1: Can I claim these credits if I’m a renter?

No. Only homeowners can claim them. Condo/co-op owners can claim a proportional share of qualifying costs.

Q2: What if my spouse and I filed separately?

Each spouse files their own Form 5695, claiming the portion they paid.

Q3: Do solar roofing tiles qualify?

Yes. Solar shingles or roofing tiles that generate electricity qualify under Part I.

Q4: Does a solar pool heater qualify?

No. Pool or spa heaters do not qualify. Only water heating for home use counts.

Q5: Can I claim both credits in the same year?

Yes. You can claim Part I and Part II credits for the same home in 2018.

Q6: What if I was deployed military in 2018?

Temporary absences (like deployment) don’t affect your main home status. You can still claim the credit.

Q7: What if I made an error on my 2018 filing?

File an amended return (Form 1040-X) with a corrected Form 5695 and supporting documents.

For More Information:
Visit IRS.gov/Form5695 for the official 2018 Form 5695 instructions and technical details.