Instructions for Form 5695 Checklist: 2018 Tax Year
Form 5695 allows taxpayers to claim residential energy credits for the 2018 tax year, including
the nonbusiness energy property credit and the residential energy-efficient property credit. The
2018 tax return reflects post-Tax Cuts and Jobs Act rules, which revised credit limitations and carryforward provisions for qualifying energy efficiency improvements.
Understanding the Two Credit Types
The residential energy-efficient property credit covers renewable energy systems installed in your home during 2018. Qualifying systems include solar panels, solar water heating systems, small wind turbines, geothermal heat pumps, and qualified fuel cells.
You can claim 30% of total costs, including labor for on-site preparation, assembly, and installation. There is no requirement that the residence be your primary residence for solar, wind, or geothermal systems; however, fuel cell property must be installed at your primary residence in the United States.
Nonbusiness energy property credits apply to specific energy-efficient building enhancements that are implemented in your primary residence. Qualifying improvements include insulation materials, exterior doors and windows meeting Energy Star requirements, metal or asphalt roofing materials, and certain residential energy properties.
This credit equals 10% of qualified energy efficiency improvements plus the full cost of residential energy property, subject to specific dollar caps. An aggregate lifetime limit of $500 applies to all tax years after 2005 for this credit.
Credit Limitations and Caps
The $500 lifetime limit for the nonbusiness energy property credit applies per taxpayer and spouse combined, not per residence. If you claimed this credit in prior years between 2006 and
2017, you must complete the Lifetime Limitation Worksheet in the 2018 Form 5695 instructions to determine remaining eligibility.
Additional property-specific caps include
- For all tax years after 2005, the combined credit allowed for exterior windows and
skylights is capped at $200, regardless of how many improvements are made.
- Each tax year, energy-efficient building property is subject to a maximum credit of $300,
even if total qualifying costs exceed that amount.
- Taxpayers may claim up to $150 per tax year for qualified natural gas, propane, or oil
furnaces and hot water boilers, with no additional credit allowed beyond this limit.
- Advanced main air circulating fans qualify for a credit of no more than $50 per tax year,
reflecting a separate limitation for this specific type of equipment.
The residential energy-efficient property credit has no lifetime dollar limit for most renewable energy property types. Qualified fuel cell property faces a separate limitation of $500 for each half-kilowatt of capacity.
Unused residential energy-efficient property credits from tax years before 2018 carry forward indefinitely with no expiration date. Regardless of your tax liability, the nonbusiness energy property credit is subject to the $500 lifetime limitation and does not carry forward.
How to Complete Form 5695 for the 2018 Tax Year
Step 1: Verify Eligibility and Gather Documentation
Confirm that your improvements qualify for the credits by reviewing the 2018 Form 5695 instructions. Homeowners can claim these credits, and cooperative apartment tenant-stockholders or condominium management association members may claim their proportionate share of qualifying costs.
Document your principal residence status with utility bills or property tax records. Manufacturer certificates confirm that your property meets Energy Star or federal efficiency requirements, and you should retain these certifications without attaching them to your tax return.
Step 2: Complete Part I for Renewable Energy Systems
Part I applies if you installed solar electric property, solar water heating property, small wind energy property, geothermal heat pumps, or fuel cells. Enter costs on the appropriate lines and include labor costs properly allocable to on-site preparation, assembly, and original installation.
For fuel cell property, verify that installation occurred at your main home located in the United
States and provide the complete address on line 7b. Line 12 allows you to enter any residential energy-efficient property credit carryforward from your 2017 Form 5695.
Step 3: Complete Part II for Energy-Efficient Home Improvements
Part II applies to the nonbusiness energy property credit for improvements made to your main home. Confirm that improvements were made to your main home located in the United States and were not related to new home construction.
You cannot claim this credit for improvements related to constructing a new home, even if you made the improvements after moving into the newly constructed residence. Enter qualified energy efficiency improvements on lines 19a through 19h and residential energy property costs on lines 22a through 22c.
Step 4: Calculate Your Available Credit
Use the Lifetime Limitation Worksheet to determine whether prior year credits affect your 2018 eligibility for the nonbusiness energy property credit. If the total of credits taken in previous years equals or exceeds $500, you cannot take the nonbusiness energy property credit in 2018.
Complete the Residential Energy-Efficient Property Credit Limit Worksheet and the
Nonbusiness Energy Property Credit Limit Worksheet to determine the portion of each credit you can claim based on your tax liability.
- Full IRS transcript retrieval (Wage & Income + Account)
- Professional tax form review
- Preparation & filing support
- Tax relief options if you owe the IRS
Step 5: Report Credits on Schedule 3
Transfer the allowable amount from Form 5695 to Schedule 3 (Form 1040), line 53, which reports nonrefundable credits for the 2018 tax year. Both the residential energy-efficient property credit and the nonbusiness energy property credit are nonrefundable, meaning they cannot generate a refund if they exceed your tax liability.
Unused residential energy-efficient property credits carry forward to future tax years with no time limit. By contrast, the nonbusiness energy property credit does not carry forward and must be used in the year claimed, subject to the $500 lifetime limit.
Important Rules and Exclusions
Subsidized energy financing reduces your qualifying costs for calculating credits. If you received a subsidy from a public utility that was not included in your gross income, you must reduce your cost by the subsidy amount before figuring your credit.
This rule also applies if a third party, such as a contractor, receives the subsidy on your behalf.
Swimming pools, hot tubs, and similar energy storage systems do not qualify for either credit, regardless of their energy efficiency ratings.
Joint occupancy requires special calculations when you own your home with someone other than your spouse. Each owner completes a separate Form 5695 and figures the credit based on the proportion of costs each owner paid.
Maximum qualifying costs apply separately to each owner for most property types, with specific formulas provided in the instructions. Married taxpayers filing jointly who own separate main homes can combine their credits up to $1,000 total for the nonbusiness energy property credit.
You must reduce the basis of your home by the amount of any residential energy-efficient property credit allowed. Verify that you have not claimed the same improvement expense on
Form 3468 or any other federal form, as double crediting the same property expense across multiple credit forms is prohibited under the 2018 instructions.
If you’re missing tax documents or want to ensure the numbers you enter match IRS records, we can help.
