Form 5695 (2021) Residential Energy Credits
Purpose and Year-Specific Context
Form 5695 (2021) computes two nonrefundable energy credits for qualified improvements to your main U.S. home. Part I calculates the residential energy-efficient property credit at 26% for solar, wind, geothermal, biomass fuel, and fuel cell properties placed in service during 2021.
The Consolidated Appropriations Act, 2021, extended this 26% rate through 2022, after which it was scheduled to decrease to 22% in 2023 and then expire. Part II claims the nonbusiness energy property credit at 10%, subject to a $500 lifetime cap with no carryforward provisions.
Completion Steps
Step 1: Verify Main Home Eligibility
Confirm that your property qualifies as your primary residence, located in the United States. Answer checkboxes on lines 7a, 17a, and 17c. Your primary residence is where you live most of the time; temporary absences for work, education, or vacation do not alter this designation.
Part I improvements can apply to any U.S. residence you own, but fuel cell property and all Part II improvements must be installed at your main home specifically.
Step 2: Enter Prior Year Credit Carryforward
Report any unused credit from your 2020 Form 5695, line 16, on line 12. The Part I residential energy-efficient property credit carries forward indefinitely if your 2021 tax liability is insufficient to use the full credit amount. Calculate any new carryforward to 2022 on line 16.
Part II credits do not carry forward under any circumstances.
Step 3: Calculate Part I Qualified Property Costs
Enter costs for qualified solar electric property (line 1), solar water heating property (line 2), small wind energy property (line 3), geothermal heat pump property (line 4), and biomass fuel property (line 5).
Include equipment costs plus labor for on-site preparation, assembly, original installation, and interconnection wiring or piping. Total these amounts on line 6a, then multiply by 26% on line 6b. The Consolidated Appropriations Act, 2021, set this rate for 2021–2022 installations.
Step 4: Process Fuel Cell Property with Kilowatt Cap
If you installed a qualified fuel cell property at your main home, enter total costs on line 8 after checking “Yes” on line 7a and providing your main home address on line 7b. Multiply line 8 by 26% on line 9.
Then multiply the system’s kilowatt capacity by $1,000 on line 10. On line 11, enter the smaller amount between lines 9 and 10, as fuel cell credits are capped at $500 for each half-kilowatt of capacity.
Step 5: Complete the Credit Limit Worksheet
Use the Residential Energy Efficient Property Credit Limit Worksheet in the 2021 instructions to calculate your tax liability limitation for line 14. Start with your Form 1040 line 18 amount, subtract other nonrefundable credits you’re claiming, and enter the result.
This prevents your Part I credit from exceeding your available tax liability. Any excess carries forward to 2022.
Step 6: Determine Credit Carryforward Amount
If line 13 exceeds line 14, subtract line 15 from line 13 and enter the difference on line 16. This unused portion carries forward to your 2022 tax return without expiration.
File Form 5695 even if you cannot use any credit in 2021, as documentation preserves your carry-forward rights. Transfer line 15 to Schedule 3 (Form 1040), line 5.
Step 7: Verify Part II Main Home Requirements
Check “Yes” on line 17a only if improvements were made to your main U.S. home. Enter your main home’s full address on line 17b. On line 17c, indicate whether improvements relate to home construction.
You cannot claim Part II credits for new construction expenses, even if improvements were installed after you moved in. Only existing home improvements and additions to existing homes qualify.
Step 8: Calculate Lifetime Limitation
Complete the Lifetime Limitation Worksheet in the 2021 instructions to determine cumulative nonbusiness energy property credits claimed in any tax year after 2005.
Add credits from your 2006, 2007, 2009, 2010, 2011, 2012, 2013, 2014, 2015, 2016, 2017, 2018, 2019, and 2020 returns. Enter this total on line 18. If your lifetime total equals or exceeds $500, you cannot claim additional Part II credit in 2021.
Step 9: Enter Qualified Energy Efficiency Improvements
Report costs for insulation materials designed to reduce heat loss or gain (line 19a), exterior doors meeting Energy Star version 6.0 requirements (line 19b), metal or asphalt roofs designed to reduce heat gain (line 19c), and exterior windows and skylights meeting Energy Star version 6.0 standards (line 19d).
Do not include labor costs for Part II improvements. Line 19e shows the $2,000 maximum for all energy efficiency improvements combined.
Step 10: Track Prior Window Expense Claims
If you claimed window expenses on Form 5695 in any year from 2006 through 2020, complete the Window Expense Worksheet in the instructions. This calculates your cumulative prior window claims, which you enter on line 19f.
Subtract line 19f from $2,000 (line 19g) to find your remaining window cost allowance. Enter the smaller of line 19d or line 19g on line 19h to enforce the cumulative window limit.
Step 11: Calculate Energy Efficiency Credit
Add lines 19a, 19b, 19c, and 19h on line 20. Multiply line 20 by 10% on line 21. This represents your credit for qualified energy efficiency improvements, which contributes to your total Part II credit but remains subject to the overall $500 lifetime cap and 2021 tax liability limitation.
Step 12: Report Residential Energy Property Costs
Enter costs for energy-efficient building property, including qualifying heat pump water heaters, heat pumps, central air conditioners, and water heaters (line 22a, maximum $300).
Report natural gas, propane, or oil furnaces or hot water boilers achieving 95% annual fuel utilization (line 22b, maximum $150). Enter advanced main air circulating fans using no more than 2% of total furnace energy (line 22c, maximum $50).
Include labor costs for these items. The Consolidated Appropriations Act, 2021, disallowed biomass fuel stoves for Part II credits starting in 2021.
Step 13: Apply Lifetime Cap and Tax Liability Limit
Line 25 shows the $500 maximum Part II credit across all post-2005 tax years. Subtract your lifetime limitation (line 26) to determine remaining eligibility (line 27).
Enter the smaller of your calculated credit (line 24) or remaining eligibility (line 27) on line 28. Complete the Nonbusiness Energy Property Credit Limit Worksheet on line 29, then enter the smaller of line 28 or line 29 on line 30.
This ensures you do not exceed either your lifetime cap or 2021 tax liability.
Step 14: Transfer Credits to Schedule 3
Report your Part I credit from line 15 and Part II credit from line 30 on Schedule 3 (Form 1040), line 5 for tax year 2021. Attach completed Form 5695 to your return.
Retain manufacturer certifications and all supporting documentation, as the IRS may request verification. These certifications prove products meet Energy Star or applicable efficiency standards, but should not be attached to your return unless specifically requested.
Step 15: Understand Credit Limitations and Phase-Out
The 26% Part I credit rate applies to property placed in service during 2021 and 2022 under the Consolidated Appropriations Act, 2021. This rate was scheduled to decrease to 22% for 2023 installations and then expire for residential properties after December 31, 2023.
Part II credits cannot exceed the $500 lifetime cap, regardless of unused capacity. Unlike Part I credits, Part II credits do not carry forward—any unused portion due to insufficient tax liability is permanently lost.
Year-Specific Updates for 2021
The Consolidated Appropriations Act, 2021, made several critical changes effective for tax year 2021. The legislation extended the 26% residential energy-efficient property credit rate to cover properties placed in service during 2021 and 2022, maintaining the scheduled phase-down to 22% for 2023 before the residential credit expires.
The Act added qualified biomass fuel property to Part I eligible costs on line 5, defining it as property using plant-derived renewable fuel to heat dwellings or water with at least 75% thermal efficiency. Conversely, the Act disallowed biomass fuel stoves from Part II nonbusiness energy property credits on line 22a, removing this option for the 10% credit category.
The nonbusiness energy property credit remained available only for existing homes, while the residential energy-efficient property credit applied to both existing homes and new construction. The $500 lifetime cap for Part II remained unchanged, and window expenses continued to be subject to the $2,000 cumulative cost limitation, with tracking requirements for claims made in prior years from 2006 forward.
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This checklist is for educational purposes only and does not constitute tax or legal advice. Always review official IRS instructions and consult a qualified professional for guidance.
