What Is the 25D Residential Clean Energy Credit?

The Residential Clean Energy Credit, under Internal Revenue Code section 25D, is a federal tax incentive for homeowners who install qualifying clean energy systems. The credit directly reduces a taxpayer’s total tax liability and applies to a percentage of the total cost of new, qualified clean energy property placed in service during the tax year.

Qualifying Clean Energy Property

To be eligible for the Residential Clean Energy Credit, the installed property must be new. Qualifying property includes solar electric systems, solar water heaters, geothermal heat pumps, and small wind energy turbines. These systems must meet certain standards to qualify, such as those set by the Energy Star program or the Solar Rating Certification Corporation.

Battery storage technology is eligible for expenses paid after December 31, 2022, as long as the battery has a capacity of at least three kilowatt-hours. Fuel cell property also qualifies but has specific requirements related to electricity generation and efficiency.

The credit covers more than just the equipment. It also includes labor costs for onsite preparation, assembly, and original installation. The costs of any piping or wiring needed to connect the system to the home are also included. For example, the labor for installing solar panels and wiring them to the electrical panel are qualified expenditures.

While solar roofing tiles that also generate energy can qualify, traditional roofing materials and structural components do not. The property must be installed in a dwelling unit located in the United States that is used as a residence by the taxpayer.

Homeowner Eligibility Rules

To claim the credit, a taxpayer must own the home where the clean energy equipment is installed. The credit is available for various types of residences, including houses, houseboats, mobile homes, condominiums, and cooperative apartments.

The home must be used as a residence by the taxpayer. While it is often a primary residence, the rules permit the credit to be claimed for a secondary home as well, as long as the taxpayer lives in it for part of the year. This flexibility is notable, as many other home-related tax benefits are limited to a principal residence. Properties used exclusively for business or as rental units where the owner does not reside are not eligible.

For homeowners who use a portion of their home for business, the credit amount may be allocated. If more than 80% of the property’s use is for non-business purposes, the full credit can be claimed. If personal use is less than 80%, the credit is reduced proportionally based on the percentage of personal use.

Calculating the Credit Value

For property placed in service between 2022 and 2032, the credit rate is 30% of qualified expenditures. Qualified expenditures include the full cost of the new clean energy property and the expenses for labor, site preparation, assembly, and installation. The rate decreases to 26% for property placed in service in 2033 and to 22% in 2034, expiring after December 31, 2034.

There is no overall dollar limit on the credit for most property types. However, a specific limitation applies to qualified fuel cell property, which is capped at $500 for each one-half kilowatt of capacity. This means a 5-kilowatt fuel cell system would have its eligible costs limited for the credit calculation.

The credit is nonrefundable, which means it can reduce a taxpayer’s liability to zero, but no portion will be paid out as a refund. If the calculated credit is larger than the taxpayer’s total tax liability, the unused portion is not lost. The excess credit can be carried forward to the following tax year.

Information and Documentation for Form 5695

To claim the Residential Clean Energy Credit, taxpayers must complete and file IRS Form 5695, Residential Energy Credits. It is necessary to gather all relevant financial records associated with the clean energy installation. This includes invoices, receipts, and any contracts from the installer that itemize the costs.

The form requires the total costs for each type of qualifying property, such as solar electric property, solar water heating property, and battery storage technology. You must also have records of the labor costs for onsite preparation and installation, as these are added to the equipment cost.

When calculating your total costs, you must subtract any subsidies or non-taxable rebates received from a utility company. If you installed fuel cell property, you will also need to calculate the specific credit limitation based on the system’s kilowatt capacity.

Filing Form 5695 with Your Tax Return

The credit is claimed for the tax year in which the property installation is completed and placed in service, not when it was purchased. For example, if you bought equipment in December 2023 but it was not installed until January 2024, you would claim the credit on your 2024 tax return. For a newly constructed home, the credit is claimed in the year the taxpayer moves in.

The completed Form 5695 is attached to your Form 1040, U.S. Individual Income Tax Return. The total credit amount calculated on Form 5695 is then transferred to Schedule 3 (Form 1040), Additional Credits and Payments.

The total credits from Schedule 3 are used to directly reduce your total tax calculated on Form 1040. This direct reduction is what lowers your overall tax liability for the year.