Understanding the HVAC Federal Tax Credit

By Anne Fonda

The Inflation Reduction Act (IRA) of 2022 offers attractive financial benefits for US homeowners who opt for energy-efficient HVAC improvements in their residences. The IRA, in an effort to promote reduced energy usage and a shift towards greener energy alternatives, provides the Energy Efficient Home Improvement Credit (25C) that can be utilized annually until 2032 to subsidize the expenses of eligible projects.

The IRA Energy Efficient Home Improvement Credit covers several categories of projects. The most substantial deductions available are the HVAC tax incentives, designed to assist you in heating and cooling your home more effectively. And that’s good news. Heating and cooling your home uses more energy than any other system in your home. For the average homeowner, 43% of your energy costs are related directly to your HVAC system.

New systems are more energy efficient and can cut your utility bills substantially and reduce your energy consumption overall. These HVAC tax credits are accessible provided that the products you install are certified by ENERGY STAR® and meet or exceed specific energy efficiency and performance standards.

You can not only reduce your energy expenses but can also receive financial assistance from the federal government for eligible upgrades! Keep in mind that these tax credits only apply to your primary residence. Vacation homes and commercial buildings do not qualify.

What HVAC system qualifies for the tax credit in 2023? Keep reading to learn more. If you installed an HVAC system in 2023, you may be eligible for the tax credit. And if you’re considering upgrading your system in the future, the HVAC tax credits are available until 2032. 

You may be eligible for a tax deduction of up to $2,000 by installing a certified air source heat pump. This is the most substantial IRA benefit for any individual project. You might be eligible if you're substituting an outdated heat pump and setting up a new one that complies with the Consortium for Energy Efficiency (CEE) tier standards in your locality.

In general, heat pumps are more efficient heating and cooling systems than the traditional AC/furnace combination. They can be up to 3x more efficient than a gas furnace for heating your home in a temperate region. Utility rates often vary between summer and winter, meaning the electricity you save in the summer often costs more while natural gas prices are higher in the winter.

Modern electric heat pumps are appropriate for houses in all types of weather conditions. If you’re in Minnesota or Maine and deal with frigid winter temperatures, you may want to consider a dual-fuel heat pump system. This refers to the process of setting up a heat pump and a gas furnace simultaneously, reaping the benefits of both. The furnace can activate to maintain your comfort regardless of how cold it is outside. Certain ductless heat pumps or mini-split systems may also qualify for the tax credit. 

Explore our heat pumps to find the right one for your home.

If you want to stay with a traditional central air conditioning system, you can earn up to 30% of the cost of air conditioning replacement or a maximum of $600 credit for installing a qualified AC unit. Split systems that have an ENERGY STAR certification with a SEER2 rating of 16 or higher qualify. ENERGY STAR-certified packaged systems are also eligible.

Explore our air conditioners to find one that meets your needs.

Split systems that are ENERGY STAR-certified with a SEER2 rating of 16 or higher qualify. All packaged systems certified by ENERGY STAR are also eligible. ENERGY STAR-certified gas furnaces with an AFUE equal to or greater than 97% are eligible. If both units are qualified, you could get a maximum of $2,600 in HVAC tax credits if you installed a qualified heat pump and a gas furnace for a dual-fuel system.

If you install a qualified split system where you replace both the AC unit and the furnace at the same time, you could qualify for up to $1,200 in credits. 

Explore our gas and oil furnaces to find the right one for your home. 

According to the IRS, a tax credit is a dollar-for-dollar amount that you can claim on your tax return that will reduce the amount of tax you owe. Some tax credits are refundable - meaning if you owe less in taxes than the tax credit amount, you can receive the money as a refund. However, the federal tax credits under the IRA are non-refundable. This means that once your tax liability is reduced to $0, you don’t get any leftover amount of the tax credit as a refund. 

However, just because you received a tax refund last year, doesn't mean you didn't have any remaining tax liability. You may still be eligible for these tax credits.

While our focus is understandably on HVAC tax credits, we want to make you aware of other tax credit options under the IRA for making your home more energy-efficient. Refer to the ENERGY STAR site again for specific products and project requirements.

Other projects may include:

A well-insulated home with energy-efficient windows and doors combined with an energy-efficient HVAC system can reduce your heating and cooling bills even further.

The IRA tax credits aren’t the only credits available for homeowners looking to make their homes more energy efficient. You can also benefit from the revised and expanded Residential Clean Energy credit, which offers a 30% federal income tax credit for residential clean energy equipment, such as::

You can claim the full value of these residential energy credits until 2032, after which they will be reduced to 22% for the years 2033 and 2034.

To maximize your savings on federal taxes, you can use these tax credits for energy-efficient upgrades to your home every year until 2032. This means you can plan for multiple projects and gradually complete them over the next few years. It's important to note that there is an annual limit but no lifetime limit on the total amount of credits you can claim through 2032.

For instance, this year you can start by conducting a home energy audit and receive a tax credit of up to $150. A home energy audit is nearly always the best place to start because it can identify areas of your home that are the biggest culprits responsible for high energy bills. You could then install a highly efficient air source heat pump for a $2,000 tax credit. You could then claim an additional $1,050 in credits for projects such as upgrading insulation or installing a natural gas water heater.

Or, you could install a new qualified air conditioner and furnace matched set and claim up to $1,200 in HVAC tax credits. That leaves you up to $2,000 in tax credits for a project such as window replacement with more energy-efficient windows.

Next year, you could install a heat pump water heater for a credit of $2,000 if you didn’t already just install a gas water heater. You could also get a tax credit of up to $250 for installing a qualifying patio door. That leaves nearly $1,000 more in available tax credits for projects such as caulking, sealing, and insulating your attic, garage, and other areas. 

You can benefit from these tax credits by upgrading your home’s energy efficiency with projects through 2032. This applies if you sell one home and move to another during that time. You could then make improvements to your new home. 

It could be beneficial to seek advice from a tax consultant for further assistance.

With federal tax credits and utility company rebates to help you pay for energy-efficient upgrades for your home, now is a great time to explore your options. American Standard offers multiple HVAC products that qualify for the 25C tax credit. Rest assured that we design our HVAC systems with you in mind with features that make your home more comfortable, more energy efficient, and even healthier. 

For further details on saving money and energy, including how to utilize the most recent utility rebates in your area, check out our deals, rebates, and tax incentives page.

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A Content Writer with Trane Technologies, Anne Fonda researches topics and writes for Trane® and associated residential HVAC brands. She works in collaboration with Trane Technologies subject matter experts, offering easy-to-understand, informative content on complex topics. Her goal is to help consumers make informed decisions on the products and services they need. 

She has written for HVAC and other service provider websites for over 16 years. Before transitioning to web content writing, Anne had a 14-year stint as an award-winning journalist. She graduated cum laude from the University of Missouri-Columbia School of Journalism.  

When she’s not working, Anne enjoys playing word games, reading, gardening, spending time with family, and visiting gardens and museums.

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