How To Take Advantage of the Federal Tax Credit for HVAC

Installing an Energy-Star certified HVAC system in your home can earn you a federal tax credit for HVAC. The U.S. government is offering tax credits to homeowners who have performed energy-efficient upgrades to reduce the country’s carbon footprint.

If you’ve already installed an energy-efficient HVAC system, you can claim the federal tax credit when filing your tax returns. Qualified homeowners can claim 25c tax credits, which equals 10 percent of the installation costs, but up to a maximum of $1,200.

As a homeowner, you should install an energy-efficient HVAC system to take advantage of the federal HVAC tax credit. Besides, you’ll save more money on cooling and heating costs. The good news is that we’ll show you how to take advantage of the tax credit.

What is the HVAC Federal Tax Credit?

A federal tax credit for HVAC systems offers incentives to homeowners investing in energy-efficient home improvements, including cooling and heating equipment. The tax credit is non-refundable, reducing taxes. This motivates people to use clean energy.

Any high-efficient HVAC system qualifies for a tax credit. However, federal tax credits only apply for non-business properties that have implemented energy-efficient home upgrades. Thankfully, Energy-Star HVAC systems are the most efficient equipment.

How the Federal HVAC Tax Credit Works

In August 2022, the U.S. federal government signed the Inflation Reduction Act (IRA) to reduce greenhouse gas emissions by 40 percent by 2030. So, it introduced new federal tax credits effective for the next ten years, starting January 1, 2023, to 2032.

So, how much do homeowners qualify for in the energy-efficient HVAC tax credit?

The U.S. government changed the lifetime tax credit cap of $500 to an annual cap of $1,200 to $2,000. However, this depends on the efficiency improvements you’ll make. You can claim tax credits for several projects, mainly when spread out over many years.

Some eligible HVAC equipment for home improvement tax credits include efficient:

  • Heat pumps
  • Heat pump water heaters
  • Energy-efficient HVAC systems
  • HVAC boilers, furnaces, and central ACs

Note that the 25c tax credit has an annual cap of $1,200, except for heat pumps. The annual tax credit cap for heat pumps, boilers, and heat pump water heaters is $2,000.

You can apply for the federal HVAC tax credit when you:

  • Purchase a new HVAC system
  • Upgrade part of your home’s HVAC system
  • Upgrade an existing home’s HVAC system
  • Update or install a new HVAC system in your primary residence

How to Qualify for the Federal Tax Credit on HVAC Systems

Before you claim a federal HVAC tax credit, you must first check your HVAC system’s Seasonal Energy Efficiency Ratio (SEER). If you don’t know anything about your HVAC SEER, you can ask your contractor to give you that information.

Besides asking your HVAC contractor, you can visit AHRI’s directory to check if your HVAC system qualifies for the federal HVAC tax credit. Thankfully, this tool will help you know if an air conditioner or heat pump is eligible for the tax credit before purchasing it.

Your air conditioner or heat pump must meet the minimum SEER standards to qualify for the federal tax credit. Notably, the U.S. government updated new SEER2 standards effective January 1, 2023. The SEER2 standards will improve the efficiency of HVACs.

If you plan to install a new HVAC system after January 1, 2023, you must ensure that it fulfills SEER2 standards for HVAC. Then, it will make it easy to qualify for tax credits for air conditioners. So, ensure you have the paperwork that shows you are eligible.

How to Apply for the Federal Tax Credit for HVAC Systems

Before you claim a tax credit for your HVAC system, ensure you have a copy of the manufacturer’s certification that shows the efficiency ratings of your HVAC system. You will not qualify for the tax credits if you don’t provide this proof.

To apply for the federal HVAC tax credit, you must fill out an additional form when filing your annual tax returns. Use IRS Form 5695 to claim a residential tax credit for home improvements, including HVAC system upgrades.

Besides obtaining your HVAC Manufacturer’s Certification Statement, remember to keep the receipts for the items you intend to write off on your taxes. 

Here are the steps to claim HVAC tax credits.

Step 1: Download Form 5695

Download and fill out Form 5695 to claim your tax credit. You can get the form from the IRS website and read the requirements to understand them better.

Step 2: Fill Out the Relevant Sections to Complete the Form

If you’ve filed a claim for nonbusiness energy property tax credits in the past, the chances might be that you’ve reached your limit. So, if you are unsure whether you’ve hit your tax credit limit, you can consult a professional experienced in tax issues.

However, if you’ve not claimed any nonbusiness energy property tax before, you can qualify for the tax credits in full amounts.

Other Programs to Save on HVAC Costs: HEEHRP

High-Efficiency Electric Home Rebate Program (HEEHRP) is another program the U.S. government has used to help homeowners save on HVAC costs. It has appropriated $4.5 billion in funds for the program and will distribute them to state energy offices.

HEEHRP offers HVAC rebates of up to $14,000 per household, including:

  • Up to $1,600 for home insulation and sealing
  • Up to $2,500 for home electrical wiring improvements
  • Up to $4,000 for electrical panel upgrades
  • Up to $8,000 for Energy-Star qualified heat pumps

The rebate amount and eligibility depend on a homeowner’s household income:

  • For households below 80 percent of the area median income, 100 percent of the system purchase price are eligible for the rebate
  • For households within 80 percent to 150 percent of area median income, 50 percent of the system purchase is eligible for the rebate
  • Households above 150 percent of area median income are not eligible for the rebate

Final Words

Installing more energy-efficient HVAC systems will not help you qualify for the federal tax credit HVAC but also reduce your electricity consumption. As a result, you’ll save more money in the long run. So, whether you’ve upgraded your HVAC system, or plan to do it, ensure you take advantage of the HVAC federal tax credit to save money.

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