Residential Energy Credits (Form 5695)—2018 Tax
Year Checklist
Overview of Residential Energy Credits for 2018
Form 5695 for the 2018 tax year allows you to claim residential energy-related tax credits under two separate parts. Part I covers the residential energy-efficient property credit. In contrast, Part
II covers the credit for nonbusiness energy properties, which was extended to apply to 2018 under revised instructions issued in February 2020. The extension affects how many taxpayers claim the credit.
Because the nonbusiness energy property credit was reinstated after many 2018 returns had been filed, most taxpayers must file Form 5695 with an amended return using Form 1040-X.
The credit applies only to qualifying improvements placed in service during 2018, and they must follow the limits and definitions in effect for that year.
Credit Categories and General Eligibility Rules
Form 5695 separates credits into two categories, each with different eligibility requirements and limitations. Understanding the distinction between Part I and Part II ensures accurate reporting and prevents disallowed claims.
Part I includes residential energy-efficient property such as solar electric systems, solar water heating systems, small wind energy property, geothermal heat pumps, and qualified fuel cell property. Part II includes qualified energy efficiency improvements and residential energy property costs, such as specific windows, doors, insulation, roofing materials, HVAC systems, water heaters, and biomass stoves, subject to detailed limitations.
Step-by-Step Completion Checklist
Step 1: Confirm the Property Meets Residence Requirements
Verify that the property qualified as a residence you used during 2018. For solar electric, solar water heating, small wind energy, and geothermal heat pump properties, the home does not need to be your main residence. For fuel cell property and all nonbusiness energy property credits, the improvements must relate to your main home.
Confirming residence status before calculating the credit prevents ineligible claims. Mixed-use or secondary properties require careful review to ensure only qualifying improvements are included.
Step 2: Identify Qualifying Energy Improvements Installed in 2018
Review the improvements made during 2018 to determine whether they qualify under Part I or
Part II. Eligible Part I property includes solar electric systems, solar water heating property, small wind energy systems, geothermal heat pumps, and fuel cell property that meets efficiency and use requirements.
Eligible Part II property includes qualified energy efficiency improvements and residential energy property costs, such as certain windows, doors, insulation, roofs, heating and cooling equipment, water heaters, and biomass stoves. Include labor costs for onsite preparation and installation for Part I and Part II residential energy property costs, but exclude installation labor for Part II building envelope components.
Step 3: Review Lifetime and Category-Specific Credit Limits
The energy property credit for nonbusiness use under Part II is subject to strict lifetime limits.
The combined lifetime limit for all nonbusiness energy property credits after 2005 is $500, and the lifetime limit for window credits after 2005 is $200.
Review your prior-year tax returns to verify the amount of credit you previously claimed.
Exceeding lifetime limits will result in part or all of the credit being disallowed.
Step 4: Apply the Correct Credit Percentage for Part II
Apply the ten percent credit rate to qualified energy efficiency improvements claimed under Part
II. Residential energy property costs under Part II are calculated separately and are subject to specific dollar caps and the tax liability limitation worksheet.
Careful separation of improvement categories ensures correct calculation. Incorrectly applying the percentage to ineligible costs may result in an overstated credit.
Step 5: Gather Required Cost and Installation Documentation
Collect invoices, receipts, and related records that show the cost and installation date of each qualifying improvement. Documentation must demonstrate that the property was placed in service during 2018 and that the costs meet eligibility requirements.
Manufacturer certification statements should be retained for your records but should not be attached to your return. Maintaining complete documentation supports the credit in the event of an IRS review.
Step 6: Complete Form 5695 Parts I and II
Complete Part I use Part I to calculate the residential energy-efficient property credit, and Part II to calculate the credit for nonbusiness energy property when applicable. Apply the limitation worksheet as required before entering final credit amounts.
Report the residential energy-efficient property credit on line 15 and the nonbusiness energy property credit on line 30 of Form 5695. Enter only allowable amounts after applying all limits.
Step 7: Determine Carryforward Availability for Part I Credits
If the residential energy-efficient property credit exceeds your tax liability for 2018, you may carry forward the unused portion to the 2019 tax year. This carryforward applies only to Part I credits and not to nonbusiness energy property credits.
Track the unused amount carefully to ensure accurate reporting in subsequent years.
Carryforward eligibility depends on the tax liability limitation applied during 2018.
Step 8: Transfer the Credit to Your 2018 Tax Return
Transfer the allowable credit amount from Form 5695 to Schedule 3 of Form 1040 for 2018.
Attach the completed Form 5695 to your 2018 return or amended return, as applicable.
For taxpayers filing Form 1040NR, report the credit on the corresponding line for that form.
Accurate transfer prevents processing delays or mismatched totals.
Step 9: Confirm All Benefits are Allowed Exist
Confirm that improvements claimed on Form 5695 were not deducted as business expenses or used to claim another federal energy credit. Certain overlaps are not permitted and may invalidate the credit.
Review business use allocations and prior filings carefully. Preventing duplicate benefits protects the validity of the credit.
- The energy property credit for nonbusiness use is available for 2018 and may require an
- Unused residential energy-efficient property credits may be carried forward to 2019.
- You must reduce the basis of your home by the amount of any allowed credit.
- Lifetime and category-specific limits continue to apply without change.
- Full IRS transcript retrieval (Wage & Income + Account)
- Professional tax form review
- Preparation & filing support
- Tax relief options if you owe the IRS
Step 10: Apply Basis Reduction Rules
Reduce the adjusted basis of your home by the amount of any residential energy credit allowed for 2018. This basis reduction affects the calculation of gain or loss when you later sell the home.
Maintain records reflecting the adjusted basis after the credit is applied. Accurate basis tracking supports proper reporting in future transactions.
Reporting and Filing Considerations for Amended
Returns
Most taxpayers claiming the 2018 credit for nonbusiness energy property must file an amended return. Form 1040-X must include the completed Form 5695 and reflect the revised credit amount.
Ensure all related schedules are consistently updated. Filing an accurate amended return allows proper recognition of the reinstated credit.
Year-Specific 2018 Credit Clarifications
Several rules specific to the 2018 tax year affect how Form 5695 credits are claimed: amended return to claim.
Recordkeeping and Compliance Considerations
Accurate completion of Form 5695 requires careful review of eligibility rules, cost limits, and documentation requirements. Maintaining organized records supports the credit and reduces the risk of disallowance.
Reviewing prior-year credits and ensuring proper carry-forward tracking protects long-term compliance. Careful adherence to 2018-specific rules ensures the credit applies as intended.
If you’re missing tax documents or want to ensure the numbers you enter match IRS records, we can help.
