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Federal Tax Credit for HVAC Systems (2024)


As someone who spends their days crawling through cramped attics and damp crawl spaces, I can tell you that heat and humidity are no joke. That’s why I was thrilled when the federal Inflation Reduction Act passed in 2022 – it meant that my fellow homeowners could finally get some relief regarding upgrading their HVAC systems.

Those fancy Energy Star-certified systems like air-source heat pumps, biomass fuel stoves, boilers, central air conditioners, and furnaces? They’re all eligible for a sweet tax credit that could save you a bundle. And let me tell you, after a long day of chasing down critters, there’s nothing better than coming home to a cool, comfortable house.

But it’s not just about keeping your cool – these high-efficiency systems can also help you save big on your energy bills. And who doesn’t love a little extra cash in their pocket? So, whether you’re looking to upgrade your old clunker or install a brand-new system, this article is going to break down everything you need to know about those juicy tax credits.

Trust me, as someone who’s seen their fair share of nightmarish HVAC setups, you’re going to want to read this one cover to cover. And hey, if you need any recommendations for HVAC companies, I know some of the best.

Click the buttons below to get connected with a local HVAC technician who can help you redeem all the financial incentives that you’re eligible for.

Highlights

  • Homeowners can take advantage of tax credits on HVAC units purchased and installed between 2023 and 2034.
  • The credit you qualify for can very depending on the type of heating and cooling system.
  • There are a handful of other tax credits homeowners looking to start their home improvement project can qualify for.

What HVAC Tax Incentives Are Available for Homeowners?

Energy Efficient Home Improvement income tax credits are available for central air conditioning systems, boilers, furnaces, air-source heat pumps, and biomass stoves that reach benchmarks for high efficiency. The credits apply to units purchased and installed between January 1, 2023, and December 31, 2034.

The expanded tax credits represent a significant increase over credits provided for HVAC-related energy efficiency home improvements in 2022 and before. These credits, along with the energy savings you’ll enjoy, are a great way to save money through lower costs for HVAC upgrades and utility bills — not to mention helping transition to a clean energy future.

The eligibility of these systems for tax credits is tied to the unit’s energy efficiency. Here’s a quick list of the terms you’ll need to know to understand how these systems are rated. Most of these terms are new from the Department of Energy as of January 2023 and set the standard for measuring the energy efficiency of HVAC systems.

  • SEER2 (Seasonal Energy Efficiency Ratio 2): The most commonly used AC efficiency rating. Calculated by dividing cooling output by input wattage over the three months of summer.
  • EER2 (Energy Efficiency Ratio 2): The EER2 rating represents the simplest way to measure AC efficiency. It is calculated by dividing the air conditioning cooling capacity by the maximum electric input in static test conditions.
  • HSPF2 (Heating Seasonal Performance Factor 2): Measures your heat pump’s energy efficiency to heat your home throughout the season. It is calculated by dividing the heating output during the heating season by the electricity used to create that output.
  • AFUE (Annual Fuel Utilization Efficiency): The ratio of a gas furnace or boiler’s annual heat output compared to its total annual fossil fuel energy consumed.

The table below summarizes the Energy Efficient Home Improvement credits you can take to install different HVAC system elements.

A great way to determine if a qualified HVAC system is eligible for a tax credit is to see if it is Energy Star-certified. If a system meets that certification, it is generally eligible for a tax credit, according to the table above.

Air-Source Heat Pump

To be eligible for the 30% tax credit, an air-source heat pump (find out the cost of heat pump installation) must be purchased and installed between January 1, 2023, and December 31, 2032, and meet the following criteria:

  • SEER2 rating greater than or equal to 16
  • EER2 rating greater than or equal to 12
  • HSPF2 rating greater than or equal to 9

If the system meets these criteria, the homeowner can claim 30% of the installation cost, not to exceed $2,000.

Boiler

Hot water boilers aren’t rated on a scale like electric heat pumps and air conditioner units — their standards are measured a bit differently. The type of fuel also plays a part in the energy efficiency rating of a boiler-based system. To receive tax credits for installation, a boiler must meet the standards below based on its type:

  • Gas boilers must be Energy Star-certified and have an AFUE of 95% or greater.
  • Eligible oil boilers must be rated by the manufacturer for use with fuel blends of at least 20% of the volume, consisting of biodiesel, renewable diesel, or second-generation biofuel.

If a boiler meets these requirements, taxpayers are eligible for tax credits of 30% of the installation cost, not to exceed $600, as long as the unit is purchased and installed between January 1, 2023, and December 31, 2032.

Central Air Conditioner

Central air conditioners are popular in the warmer regions of the country because of their ability to efficiently cool an entire home. The cooling system must have been purchased and installed in 2023 or beyond to be eligible for the expanded tax credits.

For split systems, a SEER2 rating of 16 or greater qualifies for a tax credit, and all Energy Star-certified packaged systems are also eligible. Central air conditioners are eligible for 30% of the project cost as a tax credit, not to exceed $600.

Biomass Fuel Stove

While they aren’t among the most popular ways to control the climate inside a home due to initial investment, biomass fuel stoves have gained some traction in colder environments as people look to decrease their carbon footprint.

To qualify for expanded tax credits, a biomass fuel stove must have a thermal efficiency rating of at least 75%. If it qualifies, a stove purchased and installed between 2023 and 2032 is worth 30% of the installation cost in tax credits, not to exceed $2,000.

Natural Gas and Oil Furnaces

The criteria your furnace must meet to qualify for a tax credit vary depending on the type of fuel it uses.

  • Gas furnaces must be Energy Star-certified and have an AFUE of 97% or greater.
  • Oil furnaces must be Energy Star-certified and be approved for use with fuel composed of at least 20% biodiesel, renewable diesel, or second-generation biofuel when measured by volume.

Be sure to consider the additional cost of these fuel requirements when considering your total HVAC system replacement cost. Furnaces that meet these requirements and are installed between 2023 and 2032 are eligible for credits equal to 30% of the project cost of up to $600.

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HVAC Installation

In general, you can expect to pay between $5,540 to $10,980 per HVAC unit, installation costs, and removal of your old unit.

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trane furnace cost

Furnace Replacement

In general, you can expect to pay between $4,000 and $7,000, including installation, old furnace removal, and labor.

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trane heat pump cost

Heat Pump Installation

In general, you can expect to pay between $3,000 and $35,000, but most homeowners spend between $5,800 and $7,500.

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How To Qualify For and Claim HVAC Tax Rebates

You can claim your residential energy tax incentive when you file your federal income taxes. For federal tax returns filed between 2023 and 2032, you are eligible to claim a credit equal to 30% of the cost of your installation.

The dollar limit that this credit maxes out at varies depending on what’s being upgraded. For example, boilers qualify for a 30% installation cost credit of up to $600, while you can claim up to $2,000 for a qualifying heat pump.

Today’s Homeowner Tips

To qualify for the maximum credit, you must have your upgrades installed by 2032. Beginning in 2033, the maximum percentage of your installation cost you can deduct is 26%, which drops to 22% in 2034. Beyond 2034, the credit expires; you cannot claim any percentage credit for new installations.

Here’s how to claim your HVAC tax credit when you file your federal income tax return:

  1. Keep a copy of your installation records and your manufacturer’s certification statement proving the efficiency of your system. You won’t qualify for the rebate program without them.
  2. Download and complete IRS Form 5695. Fill out the relevant section or sections of the form depending on what you’ve upgraded.
  3. If you’ve added multiple upgrades during the year, you can claim multiple rebates using the same Form 5695. You don’t need to submit a unique form for each upgrade. However, note that there is an annual limit of $3,200 for efficiency tax credits.
  4. File these forms when you file your federal taxes. Your tax professional can assist you in ensuring you can claim the maximum refund each year during the tax preparation period.

What Is the Inflation Reduction Act?

The Inflation Reduction Act is a major piece of legislation passed by the U.S. Congress in 2022. It aims to combat inflation, lower consumer energy costs, invest in domestic energy production, and reduce carbon emissions.

One key provision of the Inflation Reduction Act is the extension and expansion of federal tax credits for energy-efficient home improvements like HVAC systems, insulation, windows, and solar panels. The Act provides significant tax incentives for homeowners who invest in eligible high-efficiency equipment and renewable energy upgrades from 2023 through 2034.

The HVAC-related tax credits in particular increased dramatically compared to previous years. For example, installing an eligible air-source heat pump can qualify for a 30% tax credit worth up to $2,000 for systems installed from 2023-2032. Credits decrease slightly after 2032 but still provide substantial savings.

Overall, the goal of the Inflation Reduction Act’s energy efficiency provisions is to incentivize homeowners to upgrade to newer, more eco-friendly systems and appliances that reduce energy usage and greenhouse gas emissions. The generous tax credits help offset the upfront costs of making these sustainable home improvements.


Other Energy Tax Incentives Available for Homeowners

Because a major goal of the Inflation Reduction Act was a focus on energy efficiency, many home systems beyond HVAC equipment and even a home energy audit are eligible for expanded tax credits under the Act. Below you’ll find information on some popular credits you can take advantage of independently or in addition to HVAC-related credits.

Insulation Tax Credit

Any type of bulk insulation, including batts, rolls, blow-in fibers, rigid boards, expanding spray, and pour-in-place insulation, qualifies for a tax credit. Products that reduce air leaks can also qualify if they come with a manufacturer’s certification statement. Some examples of items that you can claim under the credit include:

  • Caulk designed to air seal
  • House wrap
  • Spray foam in a can, designed to air seal
  • Weatherstripping

You may claim up to 30% of the cost of qualifying insulation installation up to $1,200 between 2023 and 2032.

Solar Tax Credit

Installing solar panels or a solar water heater for your home can help your property value and save on energy costs. The Inflation Reduction Act extended and expanded the Residential Clean Energy Tax Credit, which provides solar tax credits.

Unlike the energy upgrades detailed above, solar tax credits aren’t subject to a maximum. As long as your upgrade qualifies, there is no dollar limit on the total amount you can claim. This portion of the Inflation Reduction Act is in effect until 2035.

With a focus on incentivizing the use of roof solar energy, tax credits of up to 30% are in place to entice homeowners to install a solar water heater instead of a traditional heat-pump water heater or solar panels to make their homes self-sufficient.

These credits remain at 30% for systems installed before December 31, 2032. This credit drops to 26% of your total cost in 2033 and finally to 22% in 2034.

Windows Tax Credit

Any new windows or skylights with the Energy Star certification are eligible for tax credits. Amounts of the credits for windows are 30% of the project cost, not to exceed $600.


Final Thoughts on the Federal HVAC Tax Credits

The new energy-efficient home tax credits included in the Inflation Reduction Act are a huge boon to homeowners looking to improve their HVAC systems to make their homes more comfortable and efficient. You’ll be able to meet these goals while saving thousands of dollars over multiple years.

Today’s Homeowner Tips

If you’re considering replacing an old or worn-down HVAC system or another major home component, you can maximize your tax benefits by spreading upgrades through multiple tax years. Remember that the total annual energy efficiency credit you can claim is $3,200 in one year, with lower limits on individual items. By delaying certain upgrades, you can save more each year on taxes.

For example, if you’re planning a total home overhaul, you could claim up to $1,200 in credit for installation expenses and up to $2,000 for an air-source heat pump.

The next year, you could claim up to $2,000 for a heat-pump water heater and up to $500 in credit toward upgrading exterior doors. If you were to make all these upgrades in one year, you could only claim a total of $3,200 in tax credits due to the annual limit.

Solar panel installation isn’t subject to the $3,200 limit — as long as your panels are installed by 2032, you can take the full 30% credit independent of other energy-efficiency home improvements subject to the $3,200 limit.

If you decide to spearhead a home energy improvement project, choosing the right local contractor for the job is important. Use the tool below to connect with a few of the best HVAC installation companies.

FAQs About HVAC Tax Credits

What is the maximum tax credit I can receive for my HVAC system?

The answer to this question will vary depending on which components your HVAC system includes. Any combination of heat pumps, heat-pump water heaters and biomass stoves/boilers are subject to an annual total limit of $2,000 in rebates. Any combination of home energy-efficient improvements (windows/doors/skylights, insulation, electrical) plus furnaces, boilers and central air conditioners cannot add up to more than $1,200 in annual rebates.


Are there state or local tax credits available for HVAC systems?

Many states have implemented tax incentives and rebates to help residents afford more energy-efficient systems. For example, residents of New York may enjoy rebates of up to $5,000 for solar panels and geothermal heat pumps that contribute to home energy and heating needs. Browse your state’s official website to learn more about the deductions and credits you qualify for.


When does the HVAC tax credit program end?

Your installation project must be in place before December 31, 2032, to take full advantage of federal HVAC tax credits. The credit fully expires in 2034.


Who qualifies for Inflation Reduction Act rebates?

The Inflation Reduction Act’s rebates and tax credits for energy-efficient home improvements like HVAC systems are available to homeowners who install qualifying products in their primary residences.

Both owners of existing homes and builders of new homes can claim the credits if the installed equipment meets the efficiency requirements outlined in the Act.

To qualify, you must own the home where the improvements are made as your primary residence. Rentals and secondary/vacation homes do not qualify for these particular rebates and credits.


What SEER rating qualifies for ENERGY STAR?

For central air conditioning systems to earn the ENERGY STAR label as of 2023, they must have a minimum SEER2 (Seasonal Energy Efficiency Ratio 2) rating of 15 in the northern U.S. and 14.3 in the southern U.S.

For air-source heat pumps, the minimum requirements are:

  • SEER2 of 15
  • HSPF2 (Heating Seasonal Performance Factor 2) of 7.5

These minimum ratings ensure that ENERGY STAR certified heating and cooling systems are among the most energy-efficient models on the market. Higher SEER2 and HSPF2 ratings qualify for larger tax credits under the Inflation Reduction Act.




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