What Is the Section 25D Residential Clean Energy Credit?
A federal tax credit may lower the cost of a home clean energy system. Understand the financial framework and procedural requirements for claiming this incentive.
The Residential Clean Energy Credit is a federal tax incentive under Internal Revenue Code Section 25D. It encourages homeowners to invest in clean energy by directly reducing their income tax liability, making renewable energy more financially accessible. The incentive applies to the costs of new, qualified clean energy property installed in a home in the United States.
Qualifying Home Energy Systems
Eligibility for the Residential Clean Energy Credit is specific to certain types of new systems and the components for their operation. The equipment must be installed in a home located in the United States. With the exception of fuel cell property, which must be installed at a primary residence, the credit is available for systems at both primary and secondary homes.
Solar Electric Property
Expenditures for solar electric property qualify for the credit. This includes the cost of solar panels or photovoltaics that generate electricity for the home. The eligible costs encompass the full expense of the panels and other equipment used to convert sunlight into electrical power for the residence.
Solar Water Heating Property
Qualified solar water heating property expenditures are covered. These systems use solar energy to heat water for the dwelling. The property must be certified by the Solar Rating Certification Corporation, and at least half of the energy it uses must be derived from the sun.
Small Wind Energy Property
Expenditures for small wind energy property are eligible if the system uses a wind turbine to generate electricity for the home. The property must have a nameplate capacity of no more than 100 kilowatts.
Geothermal Heat Pump Property
Geothermal heat pump property qualifies for the credit. These systems use the stable temperature of the ground to heat and cool a home. To be eligible, the geothermal heat pump must meet the Energy Star program requirements in effect at the time of purchase.
Fuel Cell Property
Qualified fuel cell property expenditures are eligible, but with specific limitations. This property must be installed at the taxpayer’s primary residence. The fuel cell must have a nameplate capacity of at least 0.5 kilowatts and an electricity-only generation efficiency greater than 30 percent. The credit for fuel cells is also limited to $500 for each 0.5 kilowatt of capacity.
Battery Storage Technology
Expenditures for battery storage technology are eligible when installed with a new clean energy system. The battery must have a capacity of at least 3 kilowatt-hours.
Calculating the Credit Amount
The Residential Clean Energy Credit is calculated as a percentage of the total cost of qualified property installed during the tax year. For property placed in service from 2022 through 2032, the credit is 30% of the qualifying expenses. The credit percentage is scheduled to decrease to 26% for property installed in 2033 and 22% for property installed in 2034, after which it is set to expire.
Qualified expenditures include the cost of the new clean energy equipment itself, along with labor costs for onsite preparation, assembly, and installation. Expenses for piping or wiring to connect the system are also included. The total cost must be reduced by any subsidies received from a public utility.
The Residential Clean Energy Credit does not have an overall dollar limit, except for the specific cap on fuel cell property. It is a nonrefundable credit, which means it can reduce a taxpayer’s income tax liability to zero, but no portion of the credit will be paid out as a refund beyond that point.
If the calculated credit is greater than the amount of tax owed, the unused portion is not lost. Taxpayers can carry forward the excess credit to reduce their tax liability in a future tax year. This provision allows homeowners to realize the full value of the credit over time.
Required Information for Claiming the Credit
Before filing, homeowners must gather documentation to substantiate their claim. This includes purchase invoices detailing equipment costs and statements from installers that break down labor costs for site preparation, assembly, and installation.
Homeowners must also obtain and keep any manufacturer certifications for the installed property. These documents prove that the equipment meets the technical requirements to qualify for the credit and are necessary in case the IRS requests verification.
The Residential Clean Energy Credit is claimed by completing and filing IRS Form 5695, Residential Energy Credits. The form and its instructions can be found on the IRS website. Use the totals from your invoices and contracts to fill out the appropriate lines in Part I of the form.
How to File for the Credit
The final step is to submit the required forms with your annual federal income tax return. After calculating your credit on Form 5695, you must attach this completed form 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 amount from Form 5695 will be entered on the specific line designated for the residential clean energy credit to reduce your tax.
The entire tax return package, including Form 1040, Form 5695, and Schedule 3, can be submitted electronically using tax preparation software. Alternatively, you can print and mail the completed paper forms to the IRS service center indicated in the Form 1040 instructions.