Making your home more energy-efficient can save you money on utility bills—and also reduce your tax bill. Form 5695 is how you claim federal tax credits for qualifying home improvements made during the 2023 tax year. Whether you installed solar panels, upgraded your insulation, or replaced an old furnace, this form helps you recover a portion of those costs through valuable tax credits.

What Form 5695 Is For

Form 5695, "Residential Energy Credits," allows homeowners to claim two distinct federal tax credits for energy-saving improvements made to their homes. These credits were significantly enhanced by the Inflation Reduction Act, making 2023 a particularly beneficial year for homeowners who invested in energy efficiency.

The Two Credits on Form 5695

Part I: Residential Clean Energy Credit

This covers clean energy generation and storage systems like solar panels, wind turbines, geothermal heat pumps, and battery storage. For 2023, you can claim 30% of qualifying costs with no annual dollar limit (except for fuel cells). This credit applies to both new and existing homes, and even second homes in some cases.

Part II: Energy Efficient Home Improvement Credit

This covers energy-efficient upgrades to existing homes, including insulation, windows, doors, heat pumps, and energy-efficient HVAC systems. For 2023, you can claim 30% of costs, with an annual maximum of $1,200 for most items (or $2,000 for heat pumps and biomass stoves/boilers). Unlike previous years, there's no lifetime limit—you can claim the maximum amount every year through 2032.

Both credits are nonrefundable, meaning they can reduce your tax liability to zero but won't result in a refund check. However, any unused Residential Clean Energy Credit can be carried forward to future years, while the Energy Efficient Home Improvement Credit cannot be carried forward.

When You’d Use Form 5695

Form 5695 must be filed with your tax return for the year when the energy property was installed and placed in service, not merely purchased. If you bought equipment in December 2023 but didn't install it until January 2024, you'll claim it on your 2024 return.

If You Forgot to Claim the Credit

Life gets busy, and you might file your 2023 return without realizing you qualified for these credits. Good news: you can file an amended return using Form 1040-X to claim credits you missed. According to IRS guidelines, you generally have three years from the date you filed your original return (or two years from when you paid the tax, whichever is later) to amend your return and claim a refund.

For example, if you filed your 2023 return in April 2024 but forgot to include Form 5695 for solar panels installed in 2023, you have until April 2027 to file an amended return claiming that credit.

Late Filing Situations

If you're filing a late original return (not an amendment), simply include Form 5695 with your complete tax return. The credit applies to the tax year when the improvements were installed, regardless of when you file.

Key Rules or Details for 2023

Understanding eligibility requirements helps you determine whether your improvements qualify and how much credit you can claim:

Home Requirements

• Your home must be located in the United States
• For Part I (Clean Energy): Can be your main home, second home, or even a newly constructed home
• For Part II (Energy Efficiency): Must be an existing home that you own—not new construction
• You must use the home as a residence (landlords who don't live in the property don't qualify)
• If you use part of your home for business (up to 20%), you can still claim the full credit; over 20% business use means you can only claim the credit for the residential portion

Property Must Be New

Used or previously owned equipment doesn't qualify. The property must be new, and you must be the original user. Components must have an expected lifespan of at least 5 years.

Subtract Subsidies and Rebates

This is a critical rule many taxpayers miss. If you received any rebates from manufacturers, subsidies from utility companies, or other financial incentives, you must subtract those amounts from your qualifying costs before calculating your credit. For instance, if your $10,000 solar system came with a $1,000 utility rebate, your qualifying cost is only $9,000.

Credit Limits for 2023

• Exterior doors: $250 per door, $500 total
• Windows and skylights: $600 total
• Insulation and air sealing: $1,200 (no separate limit)
• Central AC, water heaters, furnaces: $600 each
• Heat pumps and biomass stoves/boilers: $2,000 combined
• Home energy audits: $150
• Solar, wind, geothermal (Part I): No dollar limit (30% of costs)
• Fuel cells: $500 per half-kilowatt of capacity

Joint Occupancy Special Rules

If you share your home with someone other than your spouse (like an unmarried partner or roommate), each occupant must file their own Form 5695, and the credit must be allocated based on what each person paid. For 2023 specifically, joint occupants claiming Part II credits must file paper returns—electronic filing wasn't available for this situation.

Step-by-Step (High Level)

While Form 5695 may look intimidating at first glance, breaking it down into steps makes the process manageable:

Step 1: Gather Documentation

Before you start filling out the form, collect all receipts, invoices, and manufacturer certifications. You'll need proof of purchase, installation dates, and written certification that products meet energy efficiency standards. Keep these documents with your tax records—don't send them with your return unless requested.

Step 2: Determine Which Part(s) Apply

Did you install clean energy generation equipment (solar, wind, geothermal)? Use Part I. Did you make energy-efficient upgrades (insulation, windows, efficient furnaces)? Use Part II. You can complete both parts if you made both types of improvements.

Step 3: Complete Part I (Residential Clean Energy Credit)

List the complete address of the home where improvements were made. Enter costs for each type of property on the appropriate lines (solar electric, solar water heating, wind, geothermal, battery storage, fuel cells). Include labor costs for installation. The form automatically calculates 30% of these costs. If you had unused credit from 2022, you can add it here. Calculate your credit limit based on your tax liability using the worksheet in the instructions.

Step 4: Complete Part II (Energy Efficient Home Improvement Credit)

Answer eligibility questions (Is this your main home? Are you the original user?). In Section A, enter costs for qualified energy efficiency improvements (insulation, doors, windows). In Section B, enter costs for residential energy property (HVAC equipment, heat pumps, etc.). The form applies the 30% rate and then enforces the dollar limits for each category. Again, calculate your credit limit based on your tax liability.

Step 5: Transfer to Your Tax Return

The credit amounts from Form 5695 get transferred to Schedule 3 (Form 1040), which then flows to your main Form 1040. Your tax software should handle this automatically, or you'll manually transfer the amounts if filing by paper.

Step 6: Carryforward (Part I Only)

If your Residential Clean Energy Credit exceeds your tax liability, you can carry the unused portion to 2024. Note this on line 16 of Form 5695.

Common Mistakes and How to Avoid Them

Even with good intentions, taxpayers frequently make errors that delay refunds or trigger IRS notices. Here's how to sidestep the most common pitfalls:

Mistake #1: Claiming the Wrong Tax Year

The credit belongs to the year when property was installed and placed in service, not purchased. If you paid a deposit in 2023 but installation happened in 2024, claim it on your 2024 return. Double-check contractor completion dates on your invoices.

Mistake #2: Forgetting to Subtract Subsidies

Utility company rebates and manufacturer incentives must be subtracted from your costs before calculating the credit. Many taxpayers miss this step and claim too much, leading to IRS adjustments later. Review all your paperwork for any rebates or credits you received.

Mistake #3: Including Ineligible Costs

For Part II (Energy Efficiency), labor costs for building envelope components (doors, windows, insulation) are not eligible—only the product costs qualify. However, for Part I (Clean Energy) and Part II equipment (like heat pumps), labor costs are included. Read the instructions carefully for your specific improvement.

Mistake #4: Exceeding Dollar Limits

The form won't automatically stop you from claiming more than the allowed limits. If you installed three exterior doors at $500 each, you can only claim $500 total, not $1,500. Track each category's limit carefully.

Mistake #5: No Manufacturer Certification

To qualify, products must meet specific energy efficiency standards, and you can rely on manufacturer certifications to prove this. While you don't submit these with your return, you must keep them in case of an audit. Before purchasing, verify that products qualify and get written certification.

Mistake #6: Wrong Filing Method for Joint Occupants

If you share your home with a non-spouse joint occupant and are claiming Part II credits, you must file a paper return for 2023—e-filing won't accept it. Write "JOP" (Joint Occupancy Property) on the form where indicated.

Mistake #7: Claiming Improvements for New Construction

Part II (Energy Efficiency) credits are only for improvements to existing homes. If you're building a new house from scratch, you can't claim these credits for initial construction. You might qualify for Part I (Clean Energy) credits for solar panels and similar systems, though.

What Happens After You File

Once you've filed Form 5695 with your tax return, the credits work like any other nonrefundable credit, directly reducing your tax liability. Here's what to expect:

Immediate Impact on Your Return

The credit reduces your tax owed dollar-for-dollar. If you owed $5,000 in taxes and claimed $3,000 in energy credits, your tax bill drops to $2,000. If your credits exceed your tax liability, the Residential Clean Energy Credit (Part I) unused amount carries forward to next year automatically—just file Form 5695 again in 2024 showing the carryforward amount. The Energy Efficient Home Improvement Credit (Part II) doesn't carry forward; unused amounts are lost.

IRS Processing

The IRS will process your return normally. If they have questions about your credits or need additional documentation, they'll send a notice. This is why keeping thorough records—receipts, manufacturer certifications, installation dates—is crucial. You don't need to submit documentation with your return, but you must be able to produce it if audited.

Timeline for Refunds

If your energy credits result in a refund (because they reduce tax owed below what you already paid through withholding or estimated payments), expect the same refund timeline as any other tax return: typically within 21 days for e-filed returns with direct deposit.

Future Years

Keep copies of your filed Form 5695. If you're carrying forward unused Residential Clean Energy Credit, you'll need to reference it next year. Also, remember you can claim the maximum Energy Efficient Home Improvement Credit every year through 2032 with no lifetime limit, so long as you make qualifying improvements.

Audit Considerations

While energy credits don't automatically trigger audits, claiming large credits does increase scrutiny. Make sure you have complete documentation demonstrating that improvements meet all requirements: proper installation dates, manufacturer certifications of efficiency standards, proof the home is your qualifying residence, and calculations showing you properly subtracted any subsidies.

FAQs

Q1: Can I claim these credits for a rental property?

No, not if you're claiming them as a landlord. These are residential energy credits for homes where you actually live. However, if you live in one unit of a multi-unit property you own (like a duplex where you occupy one unit and rent the other), you can claim credits for improvements to your residential unit.

Q2: What's the difference between Part I and Part II credits?

Part I (Residential Clean Energy Credit) covers systems that generate or store clean energy: solar panels, wind turbines, geothermal heat pumps, fuel cells, and battery storage. It's 30% of costs with no annual dollar limit (except fuel cells), can be carried forward if unused, and applies to existing or new construction.

Part II (Energy Efficient Home Improvement Credit) covers improvements that make your existing home more energy efficient: insulation, windows, doors, energy-efficient HVAC systems, and heat pumps. It's 30% of costs with category-specific dollar limits (up to $1,200 for most items, $2,000 for heat pumps), cannot be carried forward, and only applies to existing homes.

Q3: I installed solar panels—do I qualify for both credits?

No. Solar panels (and other clean energy generation systems) only qualify for Part I (Residential Clean Energy Credit). However, if you also made separate energy efficiency improvements—like adding insulation or replacing windows—during the same year, you could claim both credits on the same Form 5695 for the different types of improvements.

Q4: How does the IRS verify I actually made these improvements?

The IRS relies on taxpayer self-reporting backed by documentation. You won't send proof with your return, but you must keep detailed records: receipts showing purchase and installation dates, contractor invoices itemizing work performed, manufacturer certifications that products meet efficiency standards, and proof of the home address. If audited, you'll need to produce these documents. The IRS may also verify manufacturers' certifications with industry databases.

Q5: Can I claim the credit if my HOA installed solar panels on our shared building?

Yes. If you're a member of a condominium association or tenant-stockholder in a cooperative housing corporation, you're treated as having paid your proportionate share of qualifying costs. The HOA or co-op should provide documentation showing the total cost and your ownership percentage. You claim your share on Form 5695.

Q6: What if I took out a loan to pay for the improvements?

The credit is based on the cost of the property, regardless of how you financed it. You can claim the credit for improvements financed with loans, credit cards, or home equity lines. However, you cannot include loan interest (including loan origination fees) in your qualifying costs—only the actual cost of the property and installation.

Q7: Do I have to claim the full credit in the year of installation, or can I spread it out?

You must claim the credit in the tax year when the property was placed in service. You can't voluntarily spread it across multiple years. However, if your tax liability is too low to use the entire Residential Clean Energy Credit (Part I), the unused portion automatically carries forward to the next year. The Energy Efficient Home Improvement Credit (Part II) doesn't carry forward—use it or lose it.

Sources

Sources: All information in this guide comes from official IRS sources, including the 2023 Instructions for Form 5695, Energy Efficient Home Improvement Credit page, Residential Clean Energy Credit page, and frequently asked questions published on IRS.gov.