What Is the Residential Energy Credit and How to Claim It

The residential energy credit is the common name for two federal income tax credits — the Energy Efficient Home Improvement Credit under Section 25C and the Residential Clean Energy Credit under Section 25D — that cover 30% of the cost of qualifying home energy upgrades and renewable energy systems. You claim both on IRS Form 5695, Residential Energy Credits, and attach it to your Form 1040.¹ Legislation signed on July 4, 2025 ended both credits for property placed in service after December 31, 2025, so eligibility now turns on whether your equipment was installed and operational by that date.² If you installed qualifying equipment during 2025 or earlier and haven’t claimed it yet, you can still file for the credit on the applicable return, and unused Section 25D amounts may carry into later years.

What Qualifies Under Each Credit

The two credits split along a clean line. Section 25C covers conventional efficiency upgrades to your home. Section 25D covers renewable energy generation.

Energy Efficient Home Improvement Credit (Section 25C)

This credit applies to three types of property.³ Building envelope components are exterior windows, skylights, exterior doors, and insulation or air sealing materials meeting Energy Star standards. Residential energy property covers heat pumps, heat pump water heaters, central air conditioners, natural gas or propane furnaces and water heaters, biomass stoves and boilers, and qualifying electrical panel upgrades. The third category is home energy audits.

Electrical panels qualify only if they have a capacity of at least 200 amps, are installed to support other qualifying equipment, and meet the National Electric Code. Home energy audits must include a written report from a certified auditor identifying the most cost-effective efficiency improvements for your home.

Everything must be new. Building envelope items must be installed in a home you own and use as your principal residence.

Residential Clean Energy Credit (Section 25D)

Section 25D covers six categories of renewable energy property:⁴

Solar electric panels that generate electricity for your home
Solar water heating systems (heated water cannot serve a pool or hot tub)
Small wind turbines for residential electricity generation
Geothermal heat pumps
Fuel cell property (principal residence only)
Battery storage technology rated at 3 kilowatt-hours or more

Section 25D reaches further than Section 25C on the residence question. It applies to any home you use personally, including a vacation home you don’t rent out. Fuel cells are the exception; they qualify only for your principal residence. Renters can claim Section 25D for qualifying property they install in a rental unit. Landlords who don’t live in the property cannot claim it. If you use part of the property for business, only the personal-use portion counts.⁵

How Much You Can Claim

Both credits equal 30% of qualifying costs. The caps are what separate them.

Section 25C Annual Caps

The Energy Efficient Home Improvement Credit has a combined annual maximum of $3,200, split into two pools.⁶ The $1,200 pool covers building envelope items, home energy audits, and most mechanical equipment. Inside that pool, sub-limits apply: $600 for all windows and skylights combined, $250 per exterior door with a $500 total cap on doors, $150 for home energy audits, and $600 for electrical panel upgrades. The separate $2,000 pool covers heat pumps, heat pump water heaters, and biomass stoves and boilers — which is why the two together reach $3,200.

These limits reset each year, and there is no lifetime cap. There is also no carryforward, which is the important trap: this credit is nonrefundable, so if your calculated Section 25C credit exceeds your federal income tax for the year, the excess is lost permanently.

Section 25D Caps

The Residential Clean Energy Credit has no annual dollar cap for most categories. You apply 30% to the full cost of your solar array, geothermal system, wind turbine, or battery system regardless of price. Fuel cell property is the one exception; it has a cap based on electrical capacity.⁵ Section 25D is also nonrefundable, but unlike Section 25C, unused amounts carry forward to future years.

Which Costs Count Toward the 30%

Labor is where people commonly miscalculate. Under Section 25C, installation labor counts for heat pumps, heat pump water heaters, central air conditioners, furnaces, water heaters, boilers, biomass stoves, and electrical panel upgrades. Labor does not count for building envelope items — windows, skylights, exterior doors, and insulation. For those, only the cost of the product itself qualifies. A $1,500 window job that breaks down as $700 in materials and $800 in labor gives you a credit basis of $700, not $1,500.⁷

Under Section 25D, labor and installation are included across all categories. A $25,000 solar installation with $8,000 in labor generates a credit based on the full $25,000.

Rebates and Utility Subsidies

Certain outside payments have to come off your qualifying expenses before you apply the 30% rate.³ You must subtract public utility subsidies for buying or installing clean energy property, whether paid to you or to your contractor. You must also subtract manufacturer or seller rebates tied to the property’s cost from anyone connected to the sale.

You do not subtract net metering credits for electricity you sell back to the grid, and most state energy efficiency incentives do not reduce your credit basis. A state incentive that doesn’t reduce the credit may still be taxable income federally, so check before filing.⁴

How to Claim It on Form 5695

File IRS Form 5695, Residential Energy Credits, with your Form 1040. Part I is the Residential Clean Energy Credit (Section 25D). Part II is the Energy Efficient Home Improvement Credit (Section 25C).¹ For each qualifying item, enter the purchase date and the total expenditure. The form runs the 30% calculation and applies the caps. It asks whether the improvements were made to your principal residence, which controls the Section 25C envelope items and Section 25D fuel cells.⁸

The credit amount then flows to Schedule 3 of Form 1040 and reduces your tax liability. Tax software attaches Form 5695 automatically when you e-file. Paper filers must include the completed form. Spouses filing separately each complete their own Form 5695.

Documentation to Keep

The IRS does not require you to submit proof with your return, but you need to be able to produce the following if the return is examined:

The manufacturer’s certification statement confirming the product meets efficiency standards. For Section 25C, qualifying manufacturers enter written agreements with the IRS, and the agency publishes a list. Verify at the product level, not just the brand.⁹
Itemized receipts that separate equipment from labor. This matters because labor counts for some Section 25C items and not others.
Product Identification Numbers. For most Section 25C property placed in service in 2025, a 17-character PIN from the manufacturer is required. Insulation, air sealing materials, and home energy audits are excepted. For a heat pump with separate indoor and outdoor units, only the outdoor unit’s PIN is needed.¹⁰

Keep records for at least three years from the date you file the return claiming the credit.¹¹

The 2025 Cutoff and Carrying Forward Unused Amounts

The eligibility date is the day the property is placed in service, meaning installed and operational, not the day you signed the contract or paid a deposit. Equipment installed in January 2026 or later does not qualify even if you paid in 2025. For construction, the IRS treats the expenditure as made when you begin using the completed structure, so a project completed in 2026 fails even with 2025 payments.²

Carryforward is the one live piece for 2026 and beyond. Section 25C has no carryforward, so any excess over your tax liability is gone. Section 25D does carry forward. If your clean energy credit for 2025 exceeds your tax bill, the unused portion moves to your 2026 return and adds to that year’s allowable credit. The statute sets no maximum number of carryforward years, so a large solar or battery installation placed in service by December 31, 2025 can continue reducing your tax liability for several years even though the credit is no longer available for new projects.⁵

1
Internal Revenue Service. About Form 5695, Residential Energy Credits
2
Internal Revenue Service. FAQs for Modification of Sections 25C, 25D, 25E, 30C, 30D, 45L, 45W, and 179D Under Public Law 119-21
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Internal Revenue Service. Energy Efficient Home Improvement Credit
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Internal Revenue Service. Residential Clean Energy Credit
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Office of the Law Revision Counsel. 26 USC 25D – Residential Clean Energy Credit
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Internal Revenue Service. Energy Efficient Home Improvement Credit – Qualifying Expenditures and Credit Amount
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Internal Revenue Service. Energy Efficient Home Improvement Credit – Labor Costs
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Internal Revenue Service. Instructions for Form 5695 (2025)
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Internal Revenue Service. Energy Efficient Home Improvement Credit Qualified Manufacturers
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Internal Revenue Service. Energy Efficient Home Improvement Credit – PIN Requirements
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Internal Revenue Service. How Long Should I Keep Records