What Qualifies for the Energy Tax Credit? Section 25C and 25D

For federal tax purposes, what qualifies for the energy tax credit falls into two buckets, and both closed to new installations on December 31, 2025. The Energy Efficient Home Improvement Credit under Section 25C covered specific building-envelope upgrades, high-efficiency heating and cooling equipment, and professional home energy audits. The Residential Clean Energy Credit under Section 25D covered solar, wind, geothermal, battery storage, and fuel cell systems. Both paid 30% of qualifying costs, with different caps and rules, and both were cut short by the One Big Beautiful Bill signed on July 4, 2025.¹ If your equipment was installed by the deadline, you can still claim the credit on your 2025 return, and unused clean energy credits carry into 2026.

The Deadline Turns on Installation, Not Payment

The cutoff hinges on when the work finished. If you paid a deposit in November 2025 but the contractor didn’t complete the installation until January 2026, the credit is off the table. The IRS treats the expenditure as made when original installation is completed.¹ For new construction, the expenditure is treated as made when you begin using the finished structure. Section 25C now terminates for property placed in service after December 31, 2025,² and Section 25D ends for expenditures made after the same date.³

Home Improvements That Qualified Under Section 25C

For eligible improvements installed in 2023, 2024, or 2025, the credit is 30% of your costs, capped at $1,200 per year overall with a separate $2,000 annual cap for heat pumps, biomass stoves, and biomass boilers.² The annual limits reset each year, so a homeowner who spread projects across multiple years could claim the credit each time.⁴ The two caps stack: new windows plus a qualifying heat pump in the same year could produce up to $3,200 in credit.

Building Envelope Components

The credit covered improvements to the physical shell of the home:

Exterior doors, up to $250 per door and $500 total per year, meeting Energy Star certification requirements.
Windows and skylights, combined annual cap of $600, meeting the stricter Energy Star Most Efficient tier rather than standard Energy Star.
Insulation and air-sealing materials meeting the prescriptive criteria of the International Energy Conservation Code in effect at the start of the tax year. No sub-cap, but these count toward the $1,200 overall limit.

A detail that trips people up: labor to install windows, doors, and insulation did not count. Only the materials themselves qualified.⁵

Residential Energy Property

Mechanical systems followed different rules. Central air conditioners, natural gas furnaces, and gas or propane water heaters each carried a $600 sub-limit and had to meet high-efficiency tiers set by the Consortium for Energy Efficiency.² Electric and natural gas heat pumps, heat pump water heaters, and biomass stoves or boilers rated at least 75% thermal efficiency fell under the separate $2,000 cap. Electrical panel upgrades qualified at 30% up to $600 if the panel supported qualifying energy property and met the National Electrical Code.

Labor counted here. A $800 charge to install a qualifying heat pump was part of the creditable expense.⁵

Home Energy Audits

A professional audit of your main home qualified for up to $150 within the $1,200 annual cap. The audit had to produce a written report identifying the most cost-effective efficiency improvements with estimated energy and cost savings. Starting in 2024, the auditor had to hold certification from a Department of Energy-approved program and sign the report with their name, taxpayer identification number, and program affiliation.⁵

Clean Energy Equipment That Qualified Under Section 25D

Section 25D worked differently. It paid 30% of the full installed cost, with no overall dollar cap for most equipment types, and it covered both equipment and labor.³ For installations completed from 2022 through December 31, 2025, qualifying equipment included:⁶

Solar electric panels, including wiring.
Solar water heaters, where at least half the energy used to heat water in the home came from the sun.
Small residential wind turbines connected to your home.
Geothermal heat pumps meeting Energy Star requirements.
Battery storage systems with at least 3 kilowatt-hours of capacity. This category was added in 2023 and did not require pairing with solar.
Fuel cells producing at least 0.5 kilowatts of electricity. Fuel cells were the one exception to the “any residence” rule: they only qualified at your principal residence.

Who Could Claim the Credits

Eligibility rules caught some filers off guard. The Section 25C credit applied only to your main home, meaning the place you live most of the year, and only to existing homes rather than new construction. Landlords who installed efficient windows or heat pumps in rental units they didn’t occupy could not claim it.⁵

Section 25D was broader. It reached any home you used as a residence, including second homes, and applied to both new construction and existing homes. Renters who paid for qualifying clean energy equipment on a leased home could potentially claim it, because the statute requires only that the taxpayer made the expenditure and uses the dwelling as a residence.³

Business Use of the Home

If you used part of your home for business, the credit depended on how much of the property was dedicated to that use. Business use of 20% or less had no effect, and you could claim the full credit. Above 20%, the credit was reduced to reflect only the personal-use share. If the property was used entirely for business, no credit was available.⁵

Rebates That Reduce Your Qualifying Cost

Rebates and subsidies for the same improvement can shrink the number you plug into the 30% calculation. The IRS treats most rebates as purchase-price adjustments, so you subtract them from your qualified expenses first. IRS Announcement 2024-19 specifically addresses payments from the Department of Energy’s Home Energy Rebates Program, sometimes called HEEHRA.⁵ State incentives generally do not reduce your qualified costs unless they qualify as a rebate or purchase-price adjustment under federal tax rules. Utility company rebates typically do reduce your basis. A $2,000 utility rebate on a $10,000 heat pump means you calculate the credit on $8,000.

Filing the Credit

Both credits are reported on IRS Form 5695, Residential Energy Credits.⁷ Part I covers Section 25D, Part II covers Section 25C, and each line ties to a specific equipment category, so keep your receipts and manufacturer certification statements at hand. The completed form attaches to Form 1040, and the calculated amounts flow to Schedule 3.⁸

Both credits are nonrefundable. They can reduce your tax to zero but won’t generate a refund on their own. What happens to leftover credit depends on which one produced it. The Section 25C credit does not carry forward: any unused portion is lost permanently.⁹ The Section 25D credit carries forward to the next tax year, so if you installed a large solar system in 2025 and your tax liability couldn’t absorb the full credit, the excess rolls onto your 2026 return.³ A $9,000 solar credit against $5,000 in liability leaves $4,000 for 2026. The 2025 Form 5695 instructions specifically reference carrying unused residential clean energy credits into 2026.¹⁰

Records to Keep

For every qualifying product, hold onto the Manufacturer’s Certification Statement confirming the item met the required efficiency standards. The Department of Energy’s Product Look Up Tool can verify that a specific model met the eligibility criteria for its installation year.¹¹ Keep detailed receipts that separate materials from labor, since the Section 25C envelope rules turn on that split. For Section 25D equipment, keep documentation showing the installation completion date, because that date is what determines eligibility if the IRS questions the claim. Hold all forms, certifications, and receipts for at least three years after filing the return that includes the credit.

1
Internal Revenue Service. FAQs for Modification of Sections 25C, 25D, 25E, 30C, 30D, 45L, 45W, and 179D Under Public Law 119-21
2
Office of the Law Revision Counsel. 26 USC 25C – Energy Efficient Home Improvement Credit
3
Office of the Law Revision Counsel. 26 USC 25D – Residential Clean Energy Credit
4
Internal Revenue Service. Home Energy Tax Credits
5
Internal Revenue Service. Energy Efficient Home Improvement Credit
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Internal Revenue Service. Residential Clean Energy Credit
7
Internal Revenue Service. About Form 5695, Residential Energy Credits
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Internal Revenue Service. Form 5695 – Residential Energy Credits
9
Internal Revenue Service. Frequently Asked Questions About Energy Efficient Home Improvements and Residential Clean Energy Property Credits – Timing of Credits
10
Internal Revenue Service. Instructions for Form 5695 (2025)
11
Department of Energy. Tax Credit Product Lookup Tool