Going green benefits both the environment and your bank account. Energy-efficient home upgrades help shave dollars off your utility bills, but they can also earn you some sizable savings on your tax bill. In an effort to incentivize citizens to opt into the green movement and consume fewer resources, the United States federal government is offering significant tax credits which can be applied to your annual income tax return. In order to do so, you’ll need to submit Form 5695 Residential Energy Credits. Not sure how? Keep reading to learn more about IRS Form 5695, which energy efficiency improvements qualify, and how to claim them for tax credit.
What is Form 5695?
Federal tax Form 5695 is used to calculate your residential energy credit, and must be submitted alongside Form 1040 with your income tax return. It’s divided into two parts based on the two different tax incentive programs, but you only need to complete whichever portion(s) are relevant to your home improvement project. If you’re not sure whether your home improvement purchases qualify for credit, it’s best to seek help from professional income tax preparation services.
Form 5695 Instructions
Those who plan to file Residential Energy Credits Form 5695 by themselves should take caution; making an error—even one done by mistake—could lead to penalties or an audit, neither of which are enjoyable. Take your time and double check your numbers on every line, carefully calculating the numbers based on how they appear exactly on your receipt. Don’t round up; perfectly even increments are a red flag in the eyes of the IRS.
Form 5695 Instructions—Part I
The first portion of IRS Form 5695 is for the residential energy-efficient property credit. It will ask you to input the amount you spent to purchase and install any energy-generating devices on your property. Be specific with the amount spent on different types of qualifying items, such as solar systems and geothermal heat pumps. On line 14, you’ll be required to enter your credit limit based on your tax liability; refer to page 4 of the Form 5695 Instruction worksheet to calculate this number. At the bottom on line 15, you’ll find the necessary instructions for how to claim your tax credit on Form 1040.
Form 5695 Instructions—Part II
The latter half of tax Form 5695 is dedicated to the non-business energy property credit. In this section, you’ll need to identify whichever energy-efficient improvements you made to your home and exactly how much they cost. Lines 23 through 28 guide you through determining how much tax credit you can claim. Use the information on page six of the Form 5695 instruction worksheet to calculate your credit limit, then follow the directions on line 30 to transfer your established credit onto Form 1040.
Form 5695 Residential Energy Credits
The Bipartisan Budget Act of 2018 (signed February 2018) reinstated a number of tax credits for residential energy efficiency that had expired in 2016. Tax credits for non-business properties are now retroactively available for purchases made through December 31, 2017. The IRS offers two residential energy credits to tax payers—the non-business energy property credit and the residential energy-efficient credit—which must be claimed using IRS Form 5695 or “Residential Energy Credits”.
Residential Energy-Efficient Property Credit
Existing homes and new construction both qualify for this tax credit on purchases of:
- Geothermal heat pumps—these source the earth’s natural heat from the ground in order to provide heating, air condition, and hot water. The heat pumps must meet the requirements of the ENERGY STAR program.
- Small wind turbines—a turbine collects kinetic energy from the wind and converts it to electricity compatible with residential homes. To meet this tax credit requirement, the turbine can generate no more than 100 kilowatts of electricity.
- Solar water heaters—these come in many different designs, but all include a collector and storage tank. They use the sun’s thermal energy to heat water, but the solar tax credit can only be claimed for heated water used inside the dwelling, not swimming pools or hot tubs.
- Solar panels (photovoltaic systems)—this solar tax credit is a great option for homeowners who would like to capture light energy from the sun and convert it directly into residential electricity. Be sure your system meets applicable fire and electrical code requirements before filing IRS Form 5695.
You can claim the residential energy-efficient property credit using tax Form 5695 for primary residences as well as secondary homes. Remember that the cost of installation is included in your tax credit and to include it on your Form 5695. You can receive up to 30% for systems placed in service by 12/31/2019.
The current tax credits for all residential renewable energy products have been extended through December 31, 2021. Make your qualified improvements and file Form 5965 sooner than later; the tax incentives will gradually step down in credit value, and investing now will award you greater savings.
Nonbusiness Energy Property Credit
The following qualified energy efficient improvements may be claimed using Form 5695 for existing, principal residences—new construction and rentals do not apply:
- Air source heat pumps
- Central air conditioning
- Gas, propane, or oil hot water boiler
- Gas, propane, or oil furnaces and fans
- Water heaters (non-solar)
- Advanced main air circulating fan
- Biomass stoves
The following energy-efficient improvements may also be claimed on IRS Form 5695, however their cost of installation is not covered:
- Roofing material
- Windows, doors, and highlights
Keep in mind that in order to receive credit via federal tax Form 5695, your new appliances must receive the ENERGY STAR seal of approval. Be sure to save your receipts and the Manufacturer’s Certification Statement for your records in the event you receive an audit and need tax help.
Community Tax Filing Services
If you’re researching how to file Form 5695, you’re probably interested in learning how to lower your tax bill. The professionals at Community Tax know each and every tax break and credit to look for, and will make sure you get the most out of your return. By opting to have our tax practitioners file a tax return with Form 5695 on your behalf, you could discover deductions and write-offs you didn’t know you were eligible for, thereby substantially lowering your tax obligation. Contact us today and see how we can help you keep your hard-earned tax dollars in your bank account—not Uncle Sam’s pocket.