Residential Energy Credits

Residential energy credits were the two federal income tax credits a homeowner could claim for energy work on a home, and the phrase is the title of the IRS form rather than a statutory term. Form 5695, Residential Energy Credits, had two parts: Part I was the residential clean energy credit under Internal Revenue Code section 25D, which covered on-site generation and storage such as solar panels, solar water heating, small wind, geothermal heat pumps, fuel cells and battery storage; Part II was the energy efficient home improvement credit under section 25C, which covered efficiency work on the building itself such as insulation, exterior windows and doors, heat pumps, and a home energy audit. Public Law 119-21 terminated both for 2026 and later, so the subject is now historical for new spending. It is not historical for tax returns, because section 25D's carryforward has no expiry.

The two credits were never one credit, and their terminations are worded differently. Section 25C(i) now provides that "this section shall not apply with respect to any property placed in service after December 31, 2025." Section 25D(h) provides that the credit "shall not apply with respect to any expenditures made after December 31, 2025." Those are different tests on their face, and the natural conclusion is that paying for a solar array in December 2025 preserved the 25D credit even if the installer finished in 2026. It did not. Section 25D(e)(8)(A) says an expenditure "shall be treated as made when the original installation of the item is completed," and (e)(8)(B) says that for work done as part of building or rebuilding a structure the expenditure is treated as made when the taxpayer first uses the structure. So for both credits the practical question was whether the work was finished, not when the check cleared.

Section 25C paid 30 percent of cost against a stack of separate annual ceilings, and the ceilings were the whole design. Section 25C(b)(1) capped the credit at $1,200 a year. Inside that, section 25C(b)(3) capped all exterior windows and skylights together at $600, section 25C(b)(4) capped any one exterior door at $250 and all exterior doors at $500, section 25C(b)(2) capped any single item of qualified energy property at $600, and section 25C(b)(6)(A) capped a home energy audit at $150. Then section 25C(b)(5) opens with "Notwithstanding paragraphs (1) and (2)" and allows up to $2,000 for heat pumps, heat pump water heaters and biomass stoves and boilers. That clause is the reason the credit was often described as worth up to $3,200 a year: $1,200 of general capacity plus a $2,000 allowance that sat outside it. No provision of the statute contains the figure $3,200. All of these amounts are as the section read on August 27, 2026, and none of them was ever indexed for inflation.

The caps reset each year, which was a change worth knowing about. Before 2023 the same section was headed "Nonbusiness energy property," paid 10 percent of the cost of building-envelope improvements plus fixed dollar amounts for heating and cooling equipment, and carried a $500 lifetime limit. The Inflation Reduction Act of 2022 rewrote it into the 30 percent credit with annual ceilings described above. A homeowner who exhausted the old lifetime cap years earlier was therefore eligible again, and a homeowner who spread work across 2023, 2024 and 2025 could claim a ceiling in each year.

Section 25D was a percentage with almost no dollar ceiling. Section 25D(g) set the credit at 30 percent for property placed in service after December 31, 2021, and the only dollar limitation in the section is section 25D(b)(1), which caps the fuel cell credit at $500 for each half kilowatt of capacity. A $40,000 ground-mount solar installation produced a $12,000 credit. Two conditions ran alongside: section 25D(e)(7) allowed only the non-business share of an item where less than 80 percent of its use was non-business, and section 25D(f) reduced the property's basis by the credit allowed, which matters on a later sale.

The credits reached different properties. Section 25C's efficiency improvements had to go into a dwelling the taxpayer owned and used as a principal residence, under section 25C(c)(1)(A). Most of section 25D's categories only required a dwelling unit in the United States "used as a residence by the taxpayer," which reaches a second home; the exception is fuel cell property, which section 25D(d)(3) confines to a principal residence.

The carryforward asymmetry is the reason this page is still live. Section 25D(c) provides that a credit exceeding the section 26(a) tax limitation "shall be carried to the succeeding taxable year and added to the credit allowable under subsection (a) for such succeeding taxable year," and the section sets no limit on how many times that can repeat. Section 25C contains no carryforward provision at all, so a homeowner whose tax was too small to absorb the 25C credit lost the excess permanently. A household that installed solar in 2025 may still be working through a 25D balance for several years; a household that replaced windows in 2025 and owed almost no tax got nothing for the part its tax could not absorb.

There is no federal replacement. Public Law 119-21 terminated the vehicle credits in the same title, and both residential credits, without enacting a successor to either. Any current federal help with the cost of home energy work comes from programs outside the income tax and is not a credit on Form 5695.

While the credits were available, the sequence ran like this.

1. Do the work and finish it. Both credits turned on completion. Section 25C keyed on when the property was placed in service; section 25D(e)(8) treated an expenditure as made when installation was complete.
2. Sort the spending by category, because the ceilings were per category rather than per project.
3. Apply 30 percent, then apply each ceiling in turn, and remember that the heat pump and biomass allowance in section 25C(b)(5) sat outside the general $1,200 ceiling rather than inside it.
4. Compare the credit to the tax. Both credits were nonrefundable, limited by section 26(a), so neither could produce a payment to a taxpayer who owed nothing.
5. Carry forward only what section 25D allowed. Unused 25D credit moved to the next year. Unused 25C credit did not move anywhere.

A hypothetical, using the section 25C ceilings as they read on August 27, 2026. In 2025 the Okonjos spend $9,000 on a qualifying air-source heat pump, $4,000 on qualifying exterior windows and $1,000 on qualifying attic insulation.

The heat pump: 30 percent of $9,000 is $2,700, and section 25C(b)(5) caps the heat pump credit at $2,000, so $2,000 counts.

The windows: 30 percent of $4,000 is $1,200, and section 25C(b)(3) caps all windows together at $600, so $600 counts.

The insulation: 30 percent of $1,000 is $300, with no separate ceiling of its own.

The windows and insulation both sit inside the general $1,200 ceiling in section 25C(b)(1). Together they are $600 plus $300, or $900, which is under $1,200, so all of it counts. The heat pump's $2,000 is outside that ceiling. The credit for the year is $2,000 plus $900, or $2,900. Had their federal income tax been only $1,500, they would have used $1,500 of the credit and lost the remaining $1,400, because section 25C has no carryforward.

The same family in the same year also installs $30,000 of qualifying solar electric property, completed in 2025. Section 25D pays 30 percent, or $9,000. If their remaining tax after the 25C credit is $6,000, they use $6,000 of the $9,000 and carry the remaining $3,000 into the following year under section 25D(c), where it is added to that year's credit.

Pros

• Section 25D paid a flat 30 percent with no dollar ceiling except on fuel cells, so it scaled with the size of the installation.
• Section 25D's carryforward has no stated expiry, so a large 2025 installation is not wasted on a household whose tax was smaller than the credit.
• Section 25C's annual ceilings replaced a $500 lifetime cap, which made staged work across several years worth more than one large year.
• Both credits reduced tax dollar for dollar rather than reducing taxable income, so their value did not depend on the taxpayer's rate.

Cons

• Both are terminated. Work finished in 2026 or later earns neither credit, and no federal successor was enacted.
• Both were nonrefundable, so a household with little or no federal income tax got little or nothing from them.
• Section 25C had no carryforward, so the ceiling that mattered was often the taxpayer's own tax rather than the statutory cap.
• Section 25C's ceilings applied per category, so a single expensive project could hit a $600 cap while the annual $1,200 sat unused.
• Section 25D(f) reduced the property's basis by the credit, which can increase the taxable gain on a later sale of the home.
• Section 25C required a product identification number from a qualified manufacturer for property placed in service after December 31, 2024, under section 25C(h), so a bargain unit from an unregistered maker disqualified the claim.