What this line means
Your final Energy Efficient Home Improvement Credit after applying the tax liability limitation. This credit is nonrefundable and does not carry forward — unlike the Part I clean energy credit, any unused amount from this credit is lost. This amount goes to Schedule 3, line 5b. Your Part I credit, if you have one, goes separately to line 5a. 1
The credit resets annually, so you lose nothing by spreading improvements across multiple tax years. If your tax liability is $2,000 and your credit is $3,200, you lose $1,200. But if you split the work across two years, you use the full credit each time.
Does this apply to you?
Easy to overlook
Combining Part I and Part II credits on one return You can claim both the Residential Clean Energy Credit (Part I) and the Energy Efficient Home Improvement Credit (Part II) in the same year. Install solar panels and replace your windows, and both credits flow to Schedule 3 — the clean energy credit to line 5a and the home improvement credit to line 5b. They are calculated separately but added together on your return. 1 IRS Form 5695 instructions — Line 30
Timing improvements to match your tax liability Because this credit does not carry forward, the size of your tax bill matters. If you expect a low tax year (new baby, large deductions, job change), consider delaying improvements to a year when your tax liability is higher. The annual limit resets regardless, so there is no penalty for waiting. 2 General filing pattern — Part II credit lost when exceeding tax liability
Watch out for this
The Part II credit does not carry forward. This is the single most important difference between Part I and Part II of Form 5695. If your tax liability is $1,500 and your Part II credit is $3,200, you get $1,500 and the remaining $1,700 vanishes. There is no line to carry it to next year’s return.
Other nonrefundable credits (child tax credit, education credits, foreign tax credit) reduce your tax liability before the energy credit is calculated. If those credits already wipe out most of your tax, the energy credit has little or no tax left to offset. Check lines 25 through 29 to see how the limitation works. 1
Footnotes
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IRS Form 5695 Instructions, Residential Energy Credits. https://www.irs.gov/pub/irs-pdf/i5695.pdf ↩ ↩2 ↩3
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IRS Publication 17, Your Federal Income Tax, Nonrefundable Credits. https://www.irs.gov/pub/irs-pdf/p17.pdf ↩