Making your home more energy-efficient can save money on utility bills—and the IRS wants to encourage that investment by offering tax credits. Form 5695 is how you claim those credits on your 2021 federal tax return. This guide breaks down everything you need to know about this form in straightforward terms, so you can maximize your tax benefits without the confusion.

What Form 5695 Is For

Form 5695 allows homeowners to claim two distinct tax credits for energy improvements made to residential properties in the United States during 2021. Think of it as the IRS's way of rewarding you for going green.

The Two Credits Available

1. Residential Energy Efficient Property Credit (Part I) – This is the more generous credit, covering 26% of qualifying costs for renewable energy systems.
   In 2021, eligible improvements included solar panels, solar water heaters, small wind turbines, geothermal heat pumps, biomass fuel systems, and fuel cell property.
   Unlike a deduction that simply reduces your taxable income, this credit directly reduces your tax bill dollar-for-dollar.
   If you spent $20,000 on qualifying solar panels in 2021, you could claim a $5,200 credit (26% of $20,000).
   The credit extends to both existing homes and new construction, and the property doesn't even need to be your main residence—a vacation home or second property qualifies too.
2. Nonbusiness Energy Property Credit (Part II) – This credit covers more modest efficiency upgrades to your existing main home.
   You can claim 10% of qualified energy efficiency improvements (like insulation, windows, doors, and certain roofing) plus the full cost of specific high-efficiency equipment (heat pumps, furnaces, water heaters, central air conditioners).
   However, there's a catch: this credit has a lifetime cap of $500 across all tax years after 2005, with additional sub-limits ($200 for windows, $300 for certain equipment).
   This credit only applies to existing homes, not new construction.

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

Original Filing

You should have filed Form 5695 with your original 2021 tax return by April 18, 2022 (or October 17, 2022, if you filed an extension).

Amended Returns

If you missed claiming these credits on your original 2021 return, you can still claim them.
You have up to three years from the original filing deadline (April 18, 2022) to file an amended return using Form 1040-X—that means until approximately April 2025 to claim 2021 energy credits retroactively.
Alternatively, you have two years from the date you actually paid the tax, whichever is later.

To amend your return, file Form 1040-X with a completed Form 5695.
The IRS typically takes 16–20 weeks to process amended returns.
Even if you missed the credit, you can potentially carry forward any unused residential energy efficient property credit to future tax years.

Late Filing Consideration

If you haven’t filed your 2021 return yet, you can still file it late with Form 5695 attached.
There’s no penalty for filing late if you’re owed a refund—though the three-year window to claim that refund is closing soon.

Key Rules or Details for 2021

Understanding the specific rules for 2021 helps you maximize your credits and avoid mistakes.

Part I: Renewable Energy Credit

• Credit rate: 26% of qualifying costs
• No dollar limit on most renewable energy systems (solar, wind, geothermal, biomass)
• Fuel cell exception: Limited to $500 per half-kilowatt of capacity
• Installation costs included (labor, wiring, piping)
• Property must be new and located in the U.S.
• Applies to both existing and new homes
• Doesn’t have to be your main home (vacation homes qualify)

Part II: Energy Efficiency Improvements

• Applies only to your main home (primary residence)
• Existing homes only—no new construction
• Lifetime limit: $500 total after 2005
• Sub-limits:
  • $200 for windows (lifetime)
  • $300 for certain equipment
  • $150 for furnaces/boilers
  • $50 for circulating fans
• Energy Star standards apply
• Installation costs excluded for building envelope components (windows, doors, insulation, roofing)
• Components must be new and used for the first time by you

Special Situations

• Subsidies reduce your credit: Rebates and subsidies must be deducted from total costs.
• Joint occupancy: Credit allocated proportionally among owners.
• Basis adjustment: Home’s tax basis must be reduced by the amount of the credit claimed.

Step-by-Step Guide (High Level)

Before you start, gather receipts, invoices, and manufacturer certifications for your energy improvements.

Part I – Residential Energy Efficient Property Credit

Step 1: Verify Eligibility (Line 7)

Confirm whether you had fuel cell property installed at your main home. If not, skip this section.

Step 2: Enter Your Costs (Lines 1–8)

Report qualifying property costs:

• Solar electric systems (Line 1)
• Solar water heating (Line 2)
• Small wind energy (Line 3)
• Geothermal heat pumps (Line 4)
• Biomass fuel property (Line 5)
• Fuel cell property (Line 8)

Step 3: Calculate the Credit (Lines 9–13)

Multiply your costs by 26%, applying any special limits for fuel cells.

Step 4: Apply Credit Limitations (Line 14)

Use the worksheet to determine how much of the credit can offset your tax.

Step 5: Determine Carryforward (Line 16)

If the credit exceeds your tax liability, carry the unused portion forward to 2022.

Part II – Nonbusiness Energy Property Credit

Step 1: Confirm Main Home Status (Line 17)

Ensure the improvements were made to your main home in the U.S.

Step 2: Check Lifetime Limitation (Line 18)

Review prior years (2006–2020) to track use of the $500 lifetime limit.

Step 3: Report Improvements (Lines 19a–19h)

Enter costs for insulation, doors, roofing, and windows (product costs only).

Step 4: Report Energy Property Costs (Lines 22a–22c)

Include costs for high-efficiency equipment (installation included).

Step 5: Calculate Credit (Lines 20–26)

Apply the 10% rate to improvements, add eligible equipment, and enforce limits.

Step 6: Apply Credit Limitations (Line 29)

Determine allowable credit based on your total tax liability.

Final Step

Transfer your allowable credits to Schedule 3 (Form 1040), which flows into your main Form 1040.

Common Mistakes and How to Avoid Them

1. Confusing New Construction with Existing Homes

Part II credits don’t apply to newly built homes—only existing ones.

2. Exceeding the Lifetime Limit

If you’ve claimed $500 or more in prior years, you can’t claim more for 2021.

3. Including Installation Costs Incorrectly

Installation costs count only for Part I and certain Part II equipment—not insulation or windows.

4. Forgetting to Subtract Rebates and Subsidies

You must reduce your total costs by any rebates received.

5. Not Keeping Manufacturer Certifications

Keep written certifications for at least three years in case of audit.

6. Joint Occupancy Allocation Errors

Each owner must file their own Form 5695 with proportional credits.

7. Mixing Up Main Home vs. Any Residence

Part I applies to any home; Part II applies only to your main home.

What Happens After You File

Processing Timeline

• Original returns: ~21 days (e-filed), ~6 weeks (paper)
• Amended returns: 16–20 weeks

How the Credit Works

Credits are nonrefundable—they can reduce your tax to zero but not below.
Unused Part I credits carry forward; Part II credits do not.

What the IRS Might Check

The IRS may request receipts, invoices, and certifications verifying your expenses.
Keep documentation for at least three years.

Refund Impact

Credits reduce your total tax owed, which may increase your refund.

Audit Considerations

Common IRS adjustments include disallowing credits for:

• Non-qualifying properties
• Inefficient products
• Amounts exceeding documented costs

FAQs

Q1: Can I claim the credit if I financed my solar panels or other improvements?

Yes. The credit applies to costs paid during 2021, regardless of payment method.

Q2: What if my tax liability is less than my credit?

Part I credits carry forward; Part II credits do not.

Q3: Do I need to itemize deductions to claim these credits?

No. These credits are independent of whether you itemize.

Q4: Can I claim credits for improvements to a rental property?

No. Form 5695 applies only to residential properties you use as a home.

Q5: What if I installed improvements in 2021 but installation finished in 2022?

Claim the credit on your 2022 return, since it’s based on completion date.

Q6: Can married couples filing separately both claim the credit?

Yes, but the total credit must be allocated based on each spouse’s payment.

Q7: What happens if I move or sell the home after claiming the credit?

Typically, nothing—credits don’t need repayment unless the property use changes.

Sources

All information in this guide comes from official IRS sources, including:

• 2021 Form 5695 Instructions
• About Form 5695
• IRS Energy Incentives guidance