Residential Energy Credit

Residential Energy Credits are claimed on Form 5695. There are two parts to this form, and those parts are addressed here in reverse order.

  • Part 1 is for renewable energy systems using Solar, Wind, and Geothermal, and it also includes Fuel Cell energy sources. PART 1 IS OUT OF SCOPE FOR TAXAIDE. If a client wants to pursue this credit, refer him/her to a paid preparer.

  • Part 2 was for installing or upgrading nonbusiness properties with high efficiency energy-consuming components, including Windows, Doors, Air Conditioners, Heat Pumps, and Water Heaters. The key to credit worthiness was the new items had to be rated as energy-efficient by the manufacturer.

    This credit was dropped for TY2018, but renewed ("extended") by congress to include TY2018 thru TY2020. Taxpayers can request their TY2018 be ammended, but the counselor and QR must BOTH be certified for TY2018.

Although Part 1 is out of scope, clients may want information to help them make their decision whether to engage the services of a paid preparer. These points may be helpful.

  1. The maximum benefit to the taxpayer is 30% of the cost of the new energy system. If the taxpayer has $7,000 in 'qualified' expenses, the maximum tax credit would be $2,100. (The maximum credit is not guarranteed: It could be less.)

  2. The credit is non-refundable. Therefore, if the taxpayer's tax liability for the tax year is less than the energy credit calculated on Form 5695, the actual credit is limited to the amount of tax liability for that tax year.

Let's apply the math to a hypothetical return: Maried taxpayers, both are retired and drawing SS benefits. They spent $7,000 on a solar system which yields a maximum credit of $2,100. (Again - calculating this credit is out of scope for TaxAide.)

Total of all income except SS = $25,300
SS income = $22,000; taxable SS = $3,655
AGI = $28,955
Standard deduction = $26,600
Taxable income = $2,355
Tax = $236

Their $2,100 solar credit has an maximum actual value of just $236 on this year's tax return, which is probably less than they would have to pay to a paid preparer. HOWEVER, excess Residential Energy Credit can be carried forward to successive tax years, in the same manner as long-term capital losses are carried forward. The taxpayer would have to consult with a paid preparer to see how their unique situation would work out for this tax year and subsequent years.