Introduction
Form 5695 is the IRS form that calculates residential energy credits for your Form 1040. Missed eligibility rules or filing errors can shrink what you claim, and the result only reaches your federal return through Schedule 3. It is a supporting form, not a refund application.
This is a US tax process. If you file from Australia, confirm you have a US filing obligation and that your home and improvement meet US requirements. The property must be in the United States.
Timing is tight. Both credits end for new spending after 31 December 2025, and the IRS reports that 2023 returns included 2,338,430 claims for the home improvement credit alone.
This guide uses US dollars and tax year 2025 forms.
Key Takeaways
- Part I covers clean energy property; Part II covers efficiency upgrades. Pick the right one first.
- Eligibility turns on tax year, placed-in-service date, home use, and ownership.
- Credits are nonrefundable; only Part I carries unused amounts forward.
- Check current IRS forms and instructions, not older line numbers.
What Is Form 5695 and Which Residential Energy Credit Applies?
Form 5695 attaches to Form 1040, 1040-SR, or 1040-NR. You use it to calculate the residential energy credit, then carry the allowed amount to Schedule 3 and on to your return.
Part I: Residential Clean Energy Credit
Part I allows a credit equal to 30% of qualifying costs for property installed from 2022 through 31 December 2025. Qualifying property includes:
- Solar electric systems
- Solar water heating (certified, with at least half the heating energy from the sun)
- Small wind
- Geothermal heat pumps meeting ENERGY STAR requirements
- Battery storage of at least 3 kWh (from 2023)
- Fuel cells, capped at $500 per half-kilowatt
Part II: Energy Efficient Home Improvement Credit
Part II also allows 30% for 2025, but with dollar caps: $1,200 per year for most items, plus a separate $2,000 for heat pumps and biomass equipment.
| Item | Credit cap |
|---|---|
| Insulation and air sealing | $1,200 (within annual cap) |
| Exterior doors | $250 per door, $500 total |
| Windows and skylights | $600 total |
| Central AC, gas/propane/oil furnaces, boilers, water heaters | $600 per item |
| Electrical panel upgrades | $600 |
| Home energy audits | $150 |
| Heat pumps, heat-pump water heaters, biomass stoves/boilers | $2,000 combined, separate cap |
Part I versus Part II
| Part I | Part II | |
|---|---|---|
| Scope | Generation and storage | Efficiency, equipment, audits |
| Limits | 30%, fuel-cell cap | 30%, annual and item caps |
| Home use | Second homes generally allowed | Envelope work: principal home you own |
| Unused credit | Carries forward | No carryforward |
Credit versus deduction
The IRS defines a credit as an amount subtracted from tax owed. A deduction reduces income instead. A credit is usually worth more dollar for dollar.
Timing matters as much as the credit type. Under P.L. 119-21, Part II ends for property placed in service after 31 December 2025, and Part I ends for expenditures made after that date. An expenditure counts when installation finishes, so paying early does not help if the work finishes in 2026.
Who Qualifies for a Residential Energy Credit?
Timing and home tests
Start with the completion date. Then check the home:
- The dwelling must be in the United States.
- Part I (except fuel cells): a residence you use personally, including a second home or rented home.
- Fuel cells: your principal residence.
- Part II doors, windows, insulation: principal residence you own.
- Part II equipment and electrical work: a residence, second home allowed.
- Part II audits: principal residence only.
Mixed use: If business use is 20% or less, the full qualifying cost counts. Above 20%, only the nonbusiness portion counts. Solely business property is excluded.
Ownership, leases, and rebates
You generally must own and pay for the property. Solar leases and power purchase agreements do not qualify, because the customer does not own the system, according to the DOE. A landlord-only home you never use personally does not qualify.
Rebates tied to the cost, such as seller-connected rebates or excludable utility subsidies, reduce your eligible cost.
Product checks
- Doors: ENERGY STAR requirements
- Windows and skylights: ENERGY STAR Most Efficient
- Insulation and air sealing: 2021 IECC criteria
- Heat pumps and conventional equipment: CEE highest efficiency tier at the start of the installation year
- Biomass: thermal efficiency of at least 75%
- Electrical panels: National Electric Code compliance, at least 200 amps
- Audits: a qualified auditor with a signed report
If you live in Australia
Living in Australia neither disqualifies nor qualifies you. U.S. citizens and resident aliens abroad generally follow the same filing rules, and 1040-NR filers are not automatically excluded.
You need a U.S. home you personally use, ownership where required, and tax liability to absorb the credit. Cross-border, rental, nonresident, or jointly owned cases deserve professional review.
VJM Global prepares Form 1040 and 1040-NR returns for U.S. individual taxpayers, including those abroad.
How to Complete Form 5695 and Report the Credit on Form 1040
Prepare
- Download the correct tax-year form and instructions.
- Decide whether Part I, Part II, or both apply.
- Sort expenses by property type and placed-in-service year.
Part I
- Enter the cost of each qualifying property, including eligible installation labour
- Remove ineligible amounts and subtract applicable rebates or subsidies
- Apply 30%, then complete the liability limit worksheet
- Enter any prior-year carryforward on line 12
Part II
- Keep categories separate: envelope improvements, equipment, and audits
- Apply item and annual caps
- Exclude envelope installation labour; labour for qualifying equipment can count
- Ordinary roofing does not qualify, though electricity-generating solar shingles can
Limits and reporting flow
Credits are nonrefundable. The calculated credit can exceed what your tax liability allows. A foreign tax credit further reduces available liability. File Form 5695 even if no Part I credit is usable this year.
For tax year 2025:
| Entry | Destination |
|---|---|
| Line 15 (allowed Part I) | Schedule 3, line 5a |
| Line 16 (unused Part I) | Carryforward to 2026 |
| Line 32 (allowed Part II) | Schedule 3, line 5b |
| Schedule 3, line 8 | Form 1040 line 20 |
Line numbers change between years, so verify each against the current forms.
After filing
Keep the completed form and records. Track any Part I carryforward. If you amend an earlier return, use that year's form.
Documentation, QMID, and Common Form 5695 Mistakes
Records checklist
- Invoices, receipts, contracts, and proof of payment
- Installation or completion evidence
- Manufacturer certification statements (keep, do not attach)
- Auditor credentials and signed report
- Rebate and subsidy records
- Ownership or financing documents
Keep records for at least three years. Property-related documents may need to stay on file longer, through the limitation period for the year you sell the home.
QMID
The Qualified Manufacturer Identification Number is a four-character alphanumeric manufacturer code. For 2025 it can replace the longer 17-character product PIN.
It applies to specified Part II items such as doors, windows, heating, cooling, biomass equipment, and enabling electrical property. Insulation, air sealing, and audits are exempt.
Obtain the QMID from the manufacturer:
- Check product labels and packaging
- Review product documents and certificates
- Contact the manufacturer if the code is missing
Mistakes to avoid
- Using the wrong tax-year form
- Failing to reduce costs for rebates
- Treating a credit like a deduction
- Claiming leased solar equipment
- Ignoring business use above 20%
- Counting envelope installation labour
- Relying on prepayment for work finished after 2025
- Using outdated Schedule 3 or 1040 lines
- Not reconciling carryforward amounts
Frequently Asked Questions
What qualifies for Form 5695?
Two categories: clean energy property (Part I) and efficiency improvements (Part II). Confirm the current IRS rules on property, home use, certification, and completion date.
Where can I find QMID?
Ask the manufacturer or installer, or check product labels and documents. Confirm the format in the current IRS instructions; for 2025 it is four alphanumeric characters.
How do I claim a residential energy credit on Form 1040?
Confirm eligibility, complete the right part of Form 5695, and apply the liability limit. Move the allowed amount to Schedule 3 and include it with your return.
Can someone living outside the United States claim a credit using Form 5695?
Residence abroad neither qualifies nor disqualifies you. It depends on the U.S. property, your ownership and use, your tax status, and your U.S. return.
Can I carry forward an unused residential energy credit?
Part I carries forward; Part II does not. Follow the current instructions and separate the calculated credit from the usable amount.
What documents should I keep for Form 5695?
Keep receipts, invoices, proof of payment, installation dates, manufacturer certifications, QMID details, rebate records, and ownership documents. Keep them even when they are not attached to the return.
