HVAC Tax Credits & Rebates for Heat Pumps & Air Conditioners

A definitive guide to the Federal & State Tax Credits & saving for HVAC equipment including air conditioners & heat pumps

Federal Tax Credit & Rebates Overview

If you are contemplating the replacement of your current HVAC system this year, you may be eligible to receive tax credits ranging from 10% to 30% of the equipment installation costs. To qualify for this credit, your system must meet specific criteria outlined in the Federal Tax Code Section 25C. This includes the installation of an Energy Star-rated heat pump on or after January 1, 2023.

What Tax credits are available for HVAC equipment in 2023:

Nonbusiness Energy Property Credit Overview

The Nonbusiness Energy Property Tax Credit, is a tax credit available to home and business owners who make qualified energy-efficient improvements to their principal residences. This credit allows homeowners to claim up to a certain percentage of the cost for eligible improvements, such as high-efficiency heating and cooling systems. The Inflation Reduction Act ensures that the credit amount is adjusted for inflation, providing continued support for energy-conscious homeowners seeking to reduce their energy consumption and environmental impact.

  • Availability – It is applicable for improvements placed in service between January 1, 2005, and December 31, 2032, providing an extended period for eligible energy-efficient upgrades. 
  • A tax credit for qualifying energy-efficient improvements made to both taxpayer’s homes or businesses properties. 
  • Amount – The credit is equal to 30% of the cost of the improvements, up to a maximum of $1,200 for homeowners and $500 for businesses.
  • Non-refundable–  it can only be used to offset the amount of taxes owed; any excess credit cannot be refunded.
  • Property – Both principal residences and rental properties are eligible for the credit, making it applicable to a wider range of property owners.
  • Eligible HVAC equipment –  The credit covers various HVAC equipment, including air conditioners, heat pumps, furnaces, and boilers, encouraging energy-efficient heating and cooling solutions.
  • HVAC equipment  efficiency –  Various
  • Usage – Taxpayers can claim the credit one time only, so it’s important to maximize eligible improvements in a single tax year.
  • Income eligibility – Eligibility for the credit is not income-based, meaning there are no specific income requirements to qualify for this tax benefit.
  • IRS Info & form -To claim the Nonbusiness Energy Property Credit, taxpayers must fill out IRS form 5695, providing details of the qualifying improvements and their associated costs. 

Please Note: tax laws and regulations may change over time, so it’s essential to consult the IRS or a tax professional for the latest information and eligibility criteria. See our disclaimer and advice below.

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Residential Clean Energy Property Credit (25C Tax Credit) Overview

You can benefit from the Residential Clean Energy Property Tax Credit, a 30% tax credit for purchasing and installing renewable energy systems, including ductless heat pumps, for your principal residence or rental property. The tax credit is capped at $2,600 for air-source heat pumps, and to qualify, the ductless heat pump must have a Seasonal Energy Efficiency Ratio (SEER) of 18 or higher. This incentive aims to promote energy-efficient choices and encourage the adoption of renewable energy solutions for residential properties.

  • Availability – The tax credit is applicable to systems placed in service between January 1, 2005, and December 31, 2032, offering an extended timeframe for eligible installations and upgrades.
  • Amount – The credit is equal to 30% of the cost of the system, providing significant savings for customers. The maximum credit available is up to $2,600, making it a substantial incentive for investing in energy-efficient HVAC solutions.
  • Non-refundable – The credit is non-refundable, meaning it can only be used to offset the amount of taxes owed. However, customers can carry forward any unused credits to future tax years, maximizing the benefits over time.
  • Property – The tax credit is available for both principal residences and rental properties, encouraging energy efficiency upgrades across various types of properties.
  • Eligible HVAC equipment – Air conditioners, Heat pumps, Furnaces, and Boilers. This broadens the scope of eligible upgrades, accommodating different heating and cooling needs.
  • HVAC equipment  efficiency –  The tax credit applies to various equipment efficiencies of 18 SEER or higher, allowing homeowners to choose the systems that best suit their energy needs and budgets.
  • Usage – You can utilize this tax credit only once, so it’s essential to maximize the benefit by installing energy-efficient HVAC equipment that meets your long-term requirements.
  • Income eligibility – Unlike some other tax incentives, this tax credit has no income eligibility requirements. It’s accessible to all taxpayers, regardless of their income level.

IRS Info & form – To claim this tax credit, you need to complete IRS form 5695 and attach it to your annual tax return. The form will help you calculate the eligible credit amount based on the HVAC equipment’s cost and its efficiency level.

Inflation Reduction Act (IRA) Overview

The Inflation Reduction Act (IRA) represents the largest climate investment in US history, aiming to address inflation, promote clean energy, and decrease greenhouse gas emissions by 31% to 44% below 2005 levels by 2030.  The  law that was passed in 2022 extends the Nonbusiness Energy Property Credit and the Residential Clean Energy Property Credit through 2032. The law also made some changes to the credits, including increasing the maximum credit amount for homeowners and making battery storage systems eligible for the Residential Clean Energy Property Credit.

  • Availability – This program is expected to be ready in late 2023 or early 2024 through 2032.
  • Amount – Provides a tax credit of 30% of the cost of installing a ductless heat pump, up to a maximum of $2,000. To qualify for the heat pump must have a SEER of 18 or higher.
  • Eligible HVAC equipment – Heat pumps are covered under the new legislation including Air source heat pumps and Geothermal heat pumps. For more HVAC IRA eligibility details click here
  • HVAC equipment  efficiency –  Various
  • Usage – Annually.  For example, if you install a new air conditioner in 2023 and a new solar water heater in 2024, you can claim the credit for both of those items in the respective years.
  • Income eligibility – Rebates and Tax Incentives defer by each state for this program. Check out this rebate calculator from Rewiring America to calculate your potential savings. 
  • IRS Info & form -Be sure to fill out the IRS form 5695 to claim your potential rebate or tax credits and attach to your tax return. 
Tax Credit form-business-finance-concept
Leveraging federal tax credits for high efficiency heat pumps and other HVAC systems

HOMES Act rebate program 

Under the HOMES Act, it provides rebates for energy efficiency upgrades that improve overall energy performance of single family homes or multi-family buildings. Applicants can show their savings by comparing energy usage before and after upgrades. This can be done through building energy models that estimate overall house performance or by direct measurement. 

  • Availability – Federal and state governments are currently still setting the program up; DOE has not provided a start date but is estimated to begin late fall 2023.
  • Amount – If the improvements result in a 20%-35%  modeled savings, homeowners can receive a $2,000 rebate, and an additional $4,000 rebate for modeling exceeding 35% savings. For lower-income homeowners and building owners with lower-income occupants, these rebates are doubled to $4,000 and $8,000, respectively.
  • Property – Applies to model energy savings for single and multi family homes. 
  • Eligible HVAC equipment -Homeowners can receive rebates for efficiency improvements, including heat pumps, based on modeled energy savings.
  • HVAC equipment  efficiency –  Based on SEER and HSPF ratings, and ENERGY STAR certification
  • Usage -Information for this rebate has not been released on whether it can be used only once or annually.  Combining the HEEHRP and the HOMES Act Rebate programs are not permitted. It is advised to consult with your tax professional for precise information regarding your eligibility for these programs.
  • Income eligibility – Rebates available are not restricted by income, but determined by performance of the whole-home electrification and energy efficiency improvements. 
  • IRS Info & form – Your State Energy Office is currently determining how the program will be rolled out and specifications. Stay tuned with the DOE and State Energy Offices for more information.
Capitol Building-washington-dc
“Savings by Legislation: The Capitol’s Role in HVAC Tax Credits”

What is the Inflation Reduction Act?

If you’re making an effort to start home improvement projects to increase your home’s energy efficiency, the Inflation Reduction Act could help you save money and reduce your carbon footprint. Like the automotive industry, there is a movement pushing towards advanced electric innovation to help decrease the effects of climate change, for the HVAC industry, this is called the electrification of heat. 

The Inflation Reduction Act (IRA)  is a federal law that was signed on August 16, 2022 by the United States congress as a 10-year program, designating a $370-billion investment to address inflation, promote clean energy, and address current climate criticism. The new federal income tax credits are accessible until 2032 and are capped annually, supplying homeowners with up to $3,200 yearly, with the hope to lower the cost of energy saving upgrades, up to 30 percent. This law provides homeowners, building owners, and contractors the ability to install and upgrade their heating and cooling systems to higher energy efficient systems in hope of reducing effects of inflation and greenhouse gas emissions. 

Custom Air strives to provide its customers with the chance to attain optimal home comfort,  decrease the need for non-renewable wastes, and to take advantage of the tax incentives and credits provided by the IRA to save money on upgrades and installs of qualified HVAC equipment. 

What HVAC equipment/ energy upgrades are qualified under the Inflation Reduction Act?

The Inflation Reduction Act (IRA) offers opportunities for homeowners to take advantage of energy-efficient HVAC products and qualify for rebates. The eligibility of these products is expected to be based on ratings such as SEER, HSPF, and EER, which measure their energy efficiency. 

  • SEER – (Seasonal Energy Efficiency Ratio) Ratings show an HVAC system’s cooling efficiency over a season vs. energy use. They’re crucial for assessing air conditioning and heat pump efficiency—higher ratings mean less energy, lower bills, and smaller environmental impact.
  • HSPF – (Heating Seasonal Performance Factor) rates heat pump heating efficiency. Higher ratings mean better output per energy unit. It’s key for consumers, guiding choices for lower bills, less impact, and winter comfort.
  • EER – (Energy Efficiency Ratio) measures AC and heat pump efficiency in set conditions (usually constant outdoor temp). It’s cooling capacity to electricity use ratio. Higher EER means better efficiency, more cooling per energy unit. Crucial for consumers, informs choices for lower bills, less impact, and hot weather comfort.

There are several energy upgrades that are available with the IRA, however, at Custom Air, we focus on installation of high-efficiency HVAC upgrades such as:

  • Electric or natural gas heat pumps
  • Central air conditioners
  • Furnaces 
  • Insulation and air sealing

These projects may be considered under:

  • New construction
  • Replacing a non-electric appliance (e.g. gas, oil or coal)
  • First time purchase with respect to the HVAC equipment

Under the IRA, there are man different programs. However, the following programs can truly show an impact on savings for HVAC upgrades in your home:

  • 25C Tax Credit which has an annual cap of $1,200 for equipment such as air conditioners and gas furnaces, while a qualified heat pump can receive up to $2,000.
  • High-Efficiency Electric Home Rebate Program (HEEHRP) which offers rebates of up to $14,000 per household, including $8,000 for ENERGY STAR qualified heat pumps and $1,600 for home insulation and sealing. 

Eligibility for rebates offered under the HEEHRP is contingent upon household income. These income-based criterias are designed to ensure that the rebate program primarily benefits households in lower-to-moderate income brackets.

  • For households with an income below 80% of the area median income, the rebate will cover 100% of the system purchase price.
  • Households falling within the income range of 80% to 150% of the area median income, qualify for a rebate amount equal to 50% of the system purchase. 
  • If the household income exceeds 150% of the area median income, it does not qualify for rebates. 

Qualifications offered under the 25C Tax Credit are dependent on the efficiency of the equipment installed. These criterias are designed to benefit homeowners that want to reduce energy consumption and adopt environmentally friendly technologies in the home. 

  • Equipment must meet the Consortium for Energy Efficiency (CEE) highest tier of ENERGY STAR 6.1 specifications
  • The annual cap is set at $3,200, distributed as $2,000 for heat pumps and $1,200 for other upgrade types.
  • Credit is non-refundable which means it reduces the amount of taxes you will owe yearly.
  • It refreshes annually, allowing you to utilize it each year until 2032.
  • The program is open to all taxpayers without income eligibility restrictions, making it accessible to homeowners across all income levels.

The implementation of state-level programs under the IRA is expected to begin in Spring 2023, with varying effective dates and available funds. It is advisable to consult a trusted HVAC contractor and tax consultant to inquire about specific eligible models and brands under the Inflation Reduction Act.

Air Conditioner and Heat Pump Tax Credit Details

Some of the HVAC rebate programs administered by the state include the High-Efficiency Electric Home rebate (HEEHR) program and the Energy Performance-Based Whole-Home (HOMES) program. These programs have been modified to offer adjusted and extended tax incentives for HVAC systems, such as the 179D Tax Reduction, 25C Tax Credit, and 45L Tax Credit.

To qualify for the tax credit in 2023, homeowners are required to purchase an air conditioner or heat pump with a minimum rating of 15 SEER (Seasonal Energy Efficiency Ratio) and 8.5 HSPF (Heating Seasonal Performance Factor). Furthermore, these systems must incorporate variable-speed technology to be eligible for the highest percentage of credits.

Conclusion

If you have been looking for the perfect time to make necessary home improvements, now is the time to do it. The IRA and tax credits are a great opportunity for homeowners to save while upgrading their homes with equipment that can be energy saving and reduces their carbon-footprint. 

At Custom Air, we want all of our customers to receive the most out of the new legislation. If you have questions, you can always call and get in contact with one of our comfort care specialists and schedule an in-home consultation. However, if we are not able to answer all of your questions, we recommend seeking advice from a tax professional. 

If you’re a homeowner in Columbus, OH or surrounding areas and you are ready to take the next step in taking advantage of the IRA and tax credits on your home’s heating and cooling upgrades, contact us today!

Disclaimer

Please note that the tax information found in this article and on this website is intended for informational purposes only. It does not replace the advice of a professional tax or financial planner, nor does it substitute the information provided by the Internal Revenue Service (IRS). Custom Air cannot ensure the accuracy of the information provided. 

Always consult with a tax professional when determining what you can and cannot claim on your taxes. Tax laws are complex and change regularly, and a tax professional can provide the most current and applicable advice.

Keep in mind that the availability of tax credits and rebates can change often as federal, state, and local policies and budgets are updated. Therefore, it’s essential to verify all information.

FAQs

These are the most Frequently Asked Questions we hear regarding HVAC Tax rebates and tax credits.

What is a heat pump and how do they work?

A heat pump is a high-efficiency product that is installed outside of your home and can replace a furnace and air conditioner. This product heats homes by extracting heat from the outdoor air, ground, or water source and transferring it indoors. Through a refrigeration cycle, the heat pump amplifies and releases the captured heat into the indoor space, providing warmth. Contrarily, a heat pump cools homes by removing heat from the indoor air and transferring it to the outdoor environment. It achieves this by circulating refrigerant that absorbs heat indoors, then releasing it outside through the condenser unit. What makes this product so environmentally friendly is it is powered by electricity instead of burning fossil fuels, making it one of the best candidates for anyone taking advantage of the IRA.

Rebate vs Tax credit: How are they different and which can I use?

Tax rebates and tax credits are both forms of tax incentives, but they differ in how they are applied and their impact on a taxpayer’s liability:

A tax rebate is a refund of a portion of taxes already paid by a taxpayer. It is typically a fixed amount or a percentage of eligible expenses or income. Rebates are often provided as a direct refund, reducing the overall tax liability. For example, if a taxpayer owes $2,000 in taxes and is eligible for a $500 rebate, their total tax liability would be reduced to $1,500.

A tax credit, on the other hand, directly reduces the amount of tax owed by a taxpayer, dollar for dollar. It is a specific amount or percentage that is subtracted directly from the tax liability. Tax credits can be non-refundable or refundable. Non-refundable tax credits can reduce the tax liability to zero but cannot result in a refund if the credit exceeds the tax owed. Refundable tax credits, however, can potentially result in a refund even if the credit exceeds the tax liability.

When it comes down to which one you should take advantage of, the availability and eligibility for tax rebates and tax credits depend on various factors, including your country, state, and specific tax laws. It is essential to consult with a tax professional or review the tax guidelines provided by your local tax authority to determine which incentives you qualify for and can utilize. They can assess your specific situation, including your expenses, income, and any applicable tax incentives, to provide accurate guidance on which rebates or credits you can use to minimize your tax liability or potentially receive a refund.

In summary, tax rebates provide a refund of taxes already paid, while tax credits directly reduce the tax liability owed. Tax credits have a more significant impact on reducing tax liability, and in some cases, can result in a refund, whereas rebates are typically fixed amounts or percentages applied to eligible expenses or income.

What types of heat pumps are there to choose from?

Although the IRA is packed with energy-efficient tax savings and credits for numerous HVAC products, heat pumps provide the best return on investment. Below are just a few examples of heat pump options available, offering different advantages and suitability for various style homes and buildings.

  • Air-source heat pump: Extracts heat from the outdoor air to heat the indoor space and can also reverse the process for cooling.
  • Ground-source heat pump (Geothermal heat pump): Utilizes the stable temperature of the ground to heat or cool a building.
  • Water-source heat pump: Transfers heat between the water source (such as a lake or well) and the building.
  • Absorption heat pump: Uses a heat source like natural gas or solar energy instead of electricity to power the heat pump.
  • Ductless mini-split heat pump: Provides heating and cooling without the need for ductwork, consisting of an outdoor unit and one or more indoor units.
  • Dual-fuel heat pump: Combines a heat pump with a backup heating system, such as a gas furnace, to provide efficient heating in colder climates.
  • Hybrid heat pump: Similar to a dual-fuel heat pump, it combines a heat pump with a secondary heating source for optimal energy efficiency.Air-to-water heat pump: Transfers heat from the outside air to heat water for radiant floor heating or domestic hot water.

Some home or building owners may have questions concerning the IRA, including “If they purchased a heat pump in 2022, are they still eligible to use the IRA tax credits?” Fortunately, according to the IRS, the previous tax credits that expired December 2021, were retroactively extended for the 2022 tax year. This means if you purchased a heat pump in 2022, you may be able to receive a 25C credit for installation. Collect any installation certificate information you have and be sure to have a conversation with your tax preparer to learn next steps.

Original Section 25C tax credit incentive levels and product qualification criteria for air and water products remain unchanged through the end of 2022 and are retroactive to qualifying products purchased after January 1, 2022, and installed prior to January 1, 2023. The maximum amount an eligible homeowner may receive in federal tax credits for purchasing and installing qualifying products is 10% of the installed cost, up to $500.