Published: January 27, 2011
Sidestep snares in the complex IRS Form 5695 to get all the 2010 energy tax credits you’ve got coming.
Fill out the right part of Form 5695
What type of system did you install? If it’s one of the following, complete Part 1 for Nonbusiness Energy Tax Credits.
Max credit: 30% of the cost of the improvement, up to $1,500.
If you installed one of these souped-up systems, complete Part 2 for Residential Energy Efficient Property Credit.
Max credit: 30% of the cost, with no limit except for a kilowatt limit on fuel cells.
What do I need on hand to fill out Form 5695?
- Receipts that show the amount you spent. The feds won’t pay for installation for some items. For those, the receipts must separate out the labor so you can add just the cost.
- Manufacturers’ certifications indicating that the improvements are eligible for the credit. Store them in a safe place in case the IRS asks for them in the future, but no need to file them with your return.
Coordinate with Form 1040 and other forms
For Part I, it’s pretty simple: Just enter the total of all this part’s credits (as shown on line 11) on Form 1040, line 52.
For Part II, it can get complicated because other credits, claimed on other forms, can affect the amount of your Part II credit.
If you need to fill out any of the following forms, have all the information needed to complete those at hand, because Form 5695, line 25, coordinates with all of them. (In fact, you’ll find it simplest to prepare all these forms more or less simultaneously.)
- Form 1040—lines 47 through 50, which refer to other credits you may be eligible for
- Publication 972—the child tax credit
- Form 8369—mortgage interest credits you may have
- Form 8859—tax credits applicable only to residents of the District of Columbia
- Form 8834—electric vehicle credit
- Form 8910—alternative motor vehicle credit
- Form 8936—electric drive motor vehicle credit
- Schedule R—care for the elderly or disabled
One form that’s irrelevant to completing 5695: Schedule A. That’s only for deductions, not credits. And you don’t even need to itemize to claim energy tax credits.
The pitfalls of Form 5695
You’ll find many places you can go wrong in both parts of the form:
Adding ineligible amounts into the form. Just because a product has an Energy Star label doesn’t mean it’s eligible for a credit. Check the details of what’s eligible for the credit and what’s not at Energy Star and make sure the product comes with a manufacturer’s certification.
Failing to keep track of this year’s energy tax credits for future years. Hang on to your tax credit paperwork (including receipts, certifications, and a copy of your completed Form 5695), because if you sell your house you’ll need to record the tax credit amount for tax purposes.
- Say you bought your home for $100,000 (the basis) and sold it for $400,000. Your profit is $300,000. But by taking tax credits, you lower your basis, so when you sell the house, you increase your profit in the eyes of the IRS. If you’re in your home for a long time and it appreciates, you increase your chances of getting hit with capital gains. Still, there’s little cause to worry: The government gives married couples selling a home a free pass on up to $500,000 of profit.
Failing to file this form at all—or only partially. If you’re eligible for a lot of different tax credits, you can conceivably reduce your tax liability to zero. If that’s the case and you want to tack on the 2010 energy tax credit, you’re out of luck. The feds consider it nonrefundable. If it were a refundable tax credit, the IRS would write you a check.
- Loophole only if you added a Part II improvement: You can carry the energy tax credit forward to 2011—or even beyond, at least as far as 2016. Even if you’re not eligible this year because you reduced your tax liability to zero, file Form 5695 anyway to make it easier to do the carryforward next year. Or just hold off installing that wind turbine until a year when you anticipate you’ll have fewer tax credits.
Forgetting certain credits that affect Part II—and vice-versa. Pay special attention to line 25: Certain other credits may ultimately affect your ability to fully claim Part II credits—just as Part II credits may affect other credits. Follow the line-by-line instructions in each form carefully. It’s easy to forget a number here.
Ack, I want help filling out Form 5695
If you find Form 5695 exasperating, you may be eligible for free tax preparation help from the:
- Volunteer Income Tax Assistance Program
- Tax Counseling for the Elderly
- IRS at 800-829-1040.
Major tax preparation software, such as TurboTax, include this form in their packages.
Barbara Eisner Bayer has written about personal finance for the past 17 years. She works hard to translate IRSese into plain English. She has unbounded respect for CPAs.