How to Claim the Energy Efficient Tax Credit

A tax credit directly reduces the amount of income tax you owe the government, providing a dollar-for-dollar reduction of your tax liability. This is more beneficial than a tax deduction, which only lowers your taxable income. The federal government offers these tax credits to homeowners as an incentive to invest in energy-saving improvements for their homes.

By making qualifying energy-efficient improvements, you can lower your annual utility bills and also decrease your federal tax bill for the year the upgrades are made. The program covers a wide range of upgrades, from new windows and doors to larger investments like solar panels.

Qualifying Improvements and Credit Limits

The federal government provides two tax credits for homeowners who invest in energy efficiency: the Energy Efficient Home Improvement Credit and the Residential Clean Energy Credit. Each covers different improvements and has unique rules for how much you can claim.

Energy Efficient Home Improvement Credit

For improvements made from 2023 through 2032, you can claim a credit equal to 30% of the cost of qualified expenses. This credit has an overall annual limit of $1,200, though some categories have lower caps. For example, the credit for new exterior doors is limited to $250 per door with a $500 total maximum, while the credit for energy-efficient windows is capped at $600 annually.

A home energy audit qualifies for a credit of up to $150. Upgrades to your home’s insulation and air sealing can qualify for the full $1,200 annual limit. Certain high-efficiency central air conditioners, furnaces, and water heaters are also eligible for a credit of up to $600.

A separate, higher limit applies to specific heating and cooling equipment. If you install qualified electric or natural gas heat pumps, heat pump water heaters, or biomass stoves and boilers, you can claim 30% of the cost, up to a separate annual limit of $2,000. This means the total potential credit you could claim in a single year is $3,200 by combining the general improvements with a qualifying heat pump system.

Residential Clean Energy Credit

This credit targets larger investments in renewable energy and is equal to 30% of the cost of new, qualified clean energy property installed between 2022 and 2032. Unlike the home improvement credit, there is no annual or lifetime dollar limit, except for fuel cell property. Eligible systems include:

• Solar panels
• Solar water heaters
• Wind turbines
• Geothermal heat pumps
• Battery storage technology with a capacity of at least 3 kilowatt-hours

The credit rate is scheduled to decrease to 26% for property installed in 2033 and 22% in 2034.

Determining Your Eligibility

To claim a residential energy credit, your property must meet IRS requirements. The Energy Efficient Home Improvement Credit requires that improvements be made to an existing home that you use as your principal residence. A principal residence is the home where you live most of the time, and you cannot claim this credit for a newly constructed home or a rental property.

The rules for the Residential Clean Energy Credit are more flexible. This credit is available for qualifying installations on both new and existing homes, and it can be claimed for a second home as long as you live in it part-time and do not rent it out.

The homeowner who pays for the improvements is eligible to claim these credits. Renters may also be able to claim the credit for certain qualified expenditures they make. These credits are available whether you take the standard deduction or itemize deductions.

Required Documentation and Information

To claim an energy tax credit, you must gather and organize specific documentation. The IRS requires you to keep thorough records, as they may be requested if your tax return is audited. The primary documents are the itemized receipts or invoices for your energy-efficient purchases. These should clearly show the cost of the products separately from the cost of labor for installation, as only the purchase price of some items, like windows and doors, is eligible for the credit.

You must also obtain and save a Manufacturer’s Certification Statement for each product. This document from the manufacturer certifies that the product meets the required energy efficiency standards. Keep this statement for your records, but do not file it with your tax return.

For improvements placed in service starting in 2025, you must also obtain a Product Identification Number for the qualifying item from its manufacturer. The manufacturer must be registered with the IRS, and you will need to include this number on your tax form to claim the credit.

This documentation is used to complete IRS Form 5695, Residential Energy Credits. On this form, you will report costs for the Residential Clean Energy Credit in Part I and costs for the Energy Efficient Home Improvement Credit in Part II. Having your documents organized helps in applying the various credit limits and calculations correctly.

How to Claim the Credit

Once your documentation is gathered, you will use it to complete Form 5695, Residential Energy Credits. The completed Form 5695 must be attached to your federal income tax return, such as Form 1040. The credit must be claimed for the tax year in which the property was installed, not the year it was purchased.

After calculating the final credit amount on Form 5695, you will transfer this total to Schedule 3 (Form 1040), “Additional Credits and Payments.” The total from Schedule 3 then flows to the main Form 1040, where it directly reduces your tax liability.

These credits are nonrefundable, which means the credit can reduce your tax liability to zero, but you will not receive any portion back as a refund if it exceeds the tax you owe. For the Energy Efficient Home Improvement Credit, any excess credit cannot be carried over to future tax years.

The Residential Clean Energy Credit has a different rule. If this credit is larger than your tax liability, you can carry forward the unused portion and apply it to reduce your taxes in future years.