CARL WATTS & ASSOCIATES

March 07, 2016

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The Home Energy Tax Credit
Still Active
Since it first came into being as the Energy Policy Act of 2005, the home energy tax credit has had a long, tumultuous existence, with subsequent limitations, renewals and extensions. It is perhaps no wonder that, once again, it has been renewed and is available through the end of 2016. Of course, home energy efficiency improvements are always advisable and, apart from trimming your taxes, you know that you can also save on your energy bills with certain home improvements.


For 2015 and 2016, the two credits existing under the home energy tax credit umbrella are: the Residential Energy Efficiency Property Credit and the Nonbusiness Energy Property Credit, and you can use Form 5695 to figure and claim your residential energy credits.

Following are some key facts to know about home energy tax credits.

First, you should know that your home is where you lived in throughout the year and can include a house, houseboat, mobile home, cooperative apartment, condominium, and a manufactured home that conforms to Federal Manufactured Home Construction and Safety Standards. It is also useful to know that you must reduce the basis of your home by the amount of any credit allowed.

Your main home is generally the home where you live most of the time. A temporary absence due to special circumstances, such as illness, education, business, military service, or vacation, will not change your main home. Your main home must be located in the U.S. to qualify for the credit.


For purposes of both credits, costs are treated as being paid when the original installation of the item is completed, or, in the case of costs connected with the reconstruction of your home, when your original use of the reconstructed home begins.

For purposes of the residential energy efficient property credit only, costs connected with the construction of a home are treated as being paid when your original use of the constructed home begins. If less than 80% of the use of an item is for nonbusiness purposes, only that portion of the costs that is allocable to the nonbusiness use can be used to determine either credit.


Only the residential energy efficient property credit is available for both existing homes and homes being constructed. The nonbusiness energy property credit is only available for existing homes.



Non-Business Energy Property Credit

Part of this credit is worth 10 percent of the cost of certain qualified energy-saving items you added to your main home last year. This may include items such as insulation, windows, doors and roofs.

The other part of the credit is not a percentage of the cost. It is for the actual cost of certain property. This may include items like water heaters and heating and air conditioning systems. The credit amount for each type of property has a different dollar limit.
This credit has a maximum lifetime limit of $500. You may only use $200 of this limit for windows.


Significant limits apply as follows:

  • This credit is worth a maximum of $500 for all years combined, from 2006 to the present;
  • Of that combined $500 limit, a maximum of $200 can be for windows;
  • The maximum tax credit for a furnace circulating fan is $50;
  • The maximum credit for a furnace or boiler is $150;
  • The maximum credit for any other single residential energy property cost is $300.

Be sure you have the written certification from the manufacturer that their product qualifies for this tax credit. They usually post it on their website or include it with the product’s packaging. You can rely on it to claim the credit, but do not attach it to your return. Keep it with your tax records.


You may claim the credit on your tax return if you didn’t reach the lifetime limit in past years.

Residential Energy Efficient Property Credit

This tax credit is 30 percent of the cost of alternative energy equipment installed on or in your home.

Qualified equipment includes:

  • Electric heat pumps;
  • Electric heat pump water heaters;
  • Central air conditioning systems;
  • Natural gas, propane or oil water heaters;
  • Stoves that use biomass fuel;
  • Natural gas, propane or oil furnaces;
  • Natural gas, propane or oil hot water boilers;
  • Advanced circulating fans for natural gas, propane or oil furnaces.

There is no dollar limit on the credit for most types of property. If your credit is more than the tax you owe, you can carry forward the unused portion of this credit to next year’s tax return.


The home must be in the U.S. It does not have to be your main home, unless the alternative energy equipment is qualified fuel cell property.

You have to use Form 5695, Residential Energy Credits, to claim these credits.

Better yet, we advise you to use a dedicated tax professional who can guide you through the maze of tax rules and regulations and take care of all your dealing with the IRS.
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