Huge HVAC Savings: Inflation Reduction Act Offers Thousands and Thousands in Tax Breaks and Rebates
HVAC Systems Federal Tax Credit (2023 Guide) and benefits of HVAC tax credits
The Inflation Reduction Act of 2022, enacted by the federal government, has brought about significant expansions and extensions to the federal income tax credits applicable to energy-efficient home improvements, encompassing various components of HVAC systems. Several Energy Star-certified equipment options are now eligible for these tax credits, including:
- Air-source heat pumps
- Biomass fuel stoves
- Central air conditioners
This article comprehensively overviews the tax credits available for specific HVAC system home improvements. In addition, it outlines the qualifying improvements and provides guidance on claiming the credits when filing your income taxes. You can save thousands of dollars by combining these tax credits with a reputable HVAC installer’s expertise.
Here are some important highlights to consider:
- Homeowners can benefit from tax credits for HVAC units purchased and installed from 2023 to 2034.
- The specific credit amount you qualify for may vary based on the type of heating and cooling system you choose.
- In addition to HVAC credits, several other tax credits are available for homeowners embarking on home improvement projects.
Available HVAC Tax Incentives for Homeowners Homeowners can take advantage of Energy Efficient Home Improvement tax credits for various HVAC system components that meet high-efficiency benchmarks. The credits apply to central air conditioning systems, boilers, furnaces, air-source heat pumps, and biomass stoves purchased and installed between January 1, 2023, and December 31, 2034.
These expanded tax credits signify a substantial increase compared to previous years, providing homeowners with significant savings on HVAC upgrades and utility bills and contributing to a cleaner energy future.
To be eligible for these tax credits, the energy efficiency of the HVAC systems is a determining factor. Familiarize yourself with the following terms, introduced by the Department of Energy in January 2023, which establish the standards for measuring HVAC system efficiency:
- SEER2 (Seasonal Energy Efficiency Ratio 2): This rating measures the efficiency of air conditioning systems by dividing the cooling output by the input wattage over the summer season.
- EER2 (Energy Efficiency Ratio 2): This rating measures air conditioning efficiency by dividing the cooling capacity by the maximum electric input under static test conditions.
- HSPF2 (Heating Seasonal Performance Factor 2): This rating assesses the energy efficiency of heat pumps in heating homes throughout the season. It is calculated by dividing the heating output by the electricity consumed.
- AFUE (Annual Fuel Utilization Efficiency): This ratio determines the energy efficiency of gas furnaces or boilers by comparing the annual heat output to the total annual fossil fuel energy consumed.
Refer to the table below for a summary of the available tax credits for Energy Efficient Home Improvement installations of various HVAC system components.
Determining Eligibility and Claiming HVAC Tax Credits
One of the simplest ways to determine if an HVAC system qualifies for a tax credit is to check if it is Energy Star-certified. Generally, if a system meets this certification, it is eligible for a tax credit, as indicated in the table above.
Air-Source Heat Pump
To qualify for a 30% tax credit, an air-source heat pump must be purchased and installed between January 1, 2023, and December 31, 2032. It should meet the following criteria:
- SEER2 rating of 16 or higher
- EER2 rating of 12 or higher
- HSPF2 rating of 9 or higher
If these criteria are met, homeowners can claim 30% of the installation cost, up to a maximum of $2,000.
Central Air Conditioner
To be eligible for the expanded tax credits, central air conditioners must have been purchased and installed in 2023 or later. The following criteria apply:
- A SEER2 rating of 16 or higher qualifies for a tax credit for split systems.
- All Energy Star-certified packaged systems are eligible.
Homeowners can claim 30% of the project cost as a tax credit, up to a maximum of $600.
Hot water boilers have different rating standards than electric heat pumps and air conditioner units. Additionally, the type of fuel used also affects the energy efficiency rating. To qualify for tax credits, a boiler must meet the following standards based on its type:
- Gas boilers must be Energy Star-certified and have an AFUE of 95% or higher.
- The manufacturer must rate eligible oil boilers for use with fuel blends containing at least 20% biodiesel, renewable diesel, or second-generation biofuel.
If these requirements are met, taxpayers can claim tax credits equivalent to 30% of the installation cost, up to a maximum of $600, provided the unit is purchased and installed between January 1, 2023, and December 31, 2032.
Biomass Fuel Stove
Although not as widely used, biomass fuel stoves have gained popularity in colder regions due to their potential to reduce carbon footprint. To qualify for expanded tax credits, a biomass fuel stove must have a thermal efficiency rating of at least 75%. Suppose it meets the requirements and is purchased and installed between 2023 and 2032. In that case, homeowners can claim a tax credit equal to 30% of the installation cost, up to a maximum of $2,000.
Natural Gas and Oil Furnaces
The eligibility criteria for furnace tax credits vary depending on the type of fuel used:
- Gas furnaces must be Energy Star-certified and have an AFUE of 97% or higher.
- Oil furnaces must be Energy Star-certified and approved for use with fuel composed of at least 20% biodiesel, renewable diesel, or second-generation biofuel by volume.
Furnaces meeting these requirements and installed between 2023 and 2032 are eligible for tax credits equal to 30% of the project cost, up to a maximum of $600.
Qualifying and Claiming HVAC Tax Credits
When filing your federal income taxes, you can claim the residential energy tax incentive. For federal tax returns filed between 2023 and 2032, you can claim a credit equal to 30% of your installation cost. The maximum dollar limit for this credit varies depending on the specific HVAC system upgrade. For example, boilers qualify for a 30% installation cost credit, capped at $600, while qualifying heat pumps can be claimed for up to $2,000.
Tips for Homeowners
To receive the maximum credit, it is essential to have your HVAC upgrades installed by 2032. Starting in 2033, the maximum deduction percentage for your installation cost decreases to 26%. In 2034, it further reduces to 22%. After 2034, the tax credit expires, and you will no longer be eligible to claim any percentage credit for new installations.
How to Claim Your HVAC Tax Credit
To claim your HVAC tax credit when filing your federal income tax return, follow these steps:
- Keep records: Retain copies of your installation records and the manufacturer’s certification statement that verifies the efficiency of your HVAC system. These documents are necessary to qualify for the rebate program.
- Complete IRS Form 5695: Download and fill out IRS Form 5695. Fill in the relevant section(s) of the form based on your upgrades.
- Multiple upgrades: If you have made multiple upgrades throughout the year, you can claim multiple rebates using the same Form 5695. You don’t need to submit a separate form for each upgrade. However, note that there is an annual limit of $3,200 for efficiency tax credits.
- File the forms: Include the completed forms when filing your federal taxes. Consult a tax professional to ensure you can claim the maximum refund during the tax preparation process.
Other Energy Tax Incentives for Homeowners
In addition to HVAC-related credits, the Inflation Reduction Act offers expanded tax credits for various home systems and energy efficiency measures. Here are some popular credits you can take advantage of independently or alongside HVAC-related credits:
Insulation Tax Credit: Any type of bulk insulation and products that reduce air leaks qualify for a tax credit. Examples include caulk, house wrap, spray foam, and weatherstripping. You can claim up to 30% of the installation cost, up to $1,200, between 2023 and 2032.
Solar Tax Credit: Installing solar panels or a solar water heater qualifies for the Residential Clean Energy Tax Credit. Unlike other upgrades, solar tax credits have no maximum limit. The credit remains at 30% for systems installed before December 31, 2032, and then reduces to 26% in 2033 and 22% in 2034. This credit is in effect until 2035.
Windows Tax Credit: Energy Star-certified windows and skylights are eligible for tax credits. The credit amounts to 30% of the project cost, not exceeding $600.
Our View on Federal HVAC Tax Credits
The new energy-efficient home tax credits provided by the Inflation Reduction Act offer significant benefits to homeowners seeking to enhance their HVAC systems, improving comfort and efficiency in their homes. These credits present an opportunity to achieve these goals while potentially saving thousands of dollars over multiple years.
Tax Tips for Homeowners Today
When contemplating replacing an old or deteriorated HVAC system, you can optimize your tax advantages by spreading the upgrades across multiple tax years. Remember that the maximum annual credit for energy efficiency is $3,200, with varying individual item limits. Therefore, strategically delaying certain upgrades can maximize your tax savings each year.
As an illustration, suppose you’re undertaking a complete home renovation. In the first year, you could claim up to $1,200 in credit for installation expenses and up to $2,000 for an air-source heat pump. The following year, you could claim up to $2,000 for a heat-pump water heater and up to $500 for upgrading exterior doors. However, if you were to make all these upgrades within a year, the total tax credits you could claim would be limited to $3,200 due to the annual cap.
It’s important to note that installing solar panels is not subject to the $3,200 limit. So as long as your panels are installed by 2032, you can take the full 30% credit, irrespective of other energy-efficiency home improvements that fall under the $3,200 limit.
Selecting a reputable local contractor is crucial if you embark on a home energy improvement project. Utilize the tool below to connect with some of your area’s top HVAC installation companies.
High-Efficiency Electric Home Rebate Program (HEEHRP) Overview:
The High-Efficiency Electric Home Rebate Program (HEEHRP) is a 10-year initiative that allocates $4.5 billion in grants to states and tribal governments for home energy improvement projects. Administered through State Energy Offices, the program is expected to begin mid-2023. Specific program parameters may vary by state.
Key Rebate Program Details:
- Single-home maximum cost offset: $14,000
- Caps per qualified equipment type:
- Heat pump: $8,000
- Heat pump water heater: $1,750
- Insulation, air sealing, and ventilation: $1,600
- Electric wiring: $2,500
- Electric load center upgrade: $4,000
- Stove, cooktop, range, oven, or heat pump clothes dryer: $840
- Contractors can receive up to a $500 rebate per heat pump installation.
- Heat pump systems must meet ENERGY STAR® criteria to qualify for the rebate.
- The program is designed to support low-to-moderate income (LMI) households.
Rebate Examples Based on Income:
- Households with income up to 80% of the local median income can receive a 100% rebate of up to $8,000 for heat pump installation. The household must spend at least $16,000 on heat pump installation to claim the maximum rebate.
- Moderate-income households (80-150% of the local median income) are eligible for a 50% rebate up to the same limits.
- Households with incomes above 150% of the local median are not eligible for the rebate.
Program Stacking and Combinations:
- The rebate program cannot be stacked with other federal or state grants/rebates for the same project. However, there are options for combining rebates. Refer to the FAQ section for possible scenarios.
HOMES Rebate Program:
The HOMES Rebate Program funds the Department of Energy (DOE) for state energy offices ($4.3 billion) to develop and implement a rebate program for whole-house energy-saving retrofits. Rebate levels are based on modeled energy savings for single and multi-family homes, as follows:
- Homes with a 20% energy reduction are eligible for a maximum rebate of $2,000 or half the retrofit project cost (whichever is less).
- Homes with a 35% energy reduction are eligible for a maximum rebate of $4,000.
- Homes with a 35% energy reduction and qualifying as lower income (<80% of local median income) are eligible for a maximum rebate of $8,000.
In conclusion, the Inflation Reduction Act 2022 has introduced significant expansions and extensions to federal income tax credits for energy-efficient home improvements, including HVAC systems.
Homeowners can now benefit from substantial tax breaks and rebates when purchasing and installing eligible HVAC equipment between 2023 and 2034. Homeowners can save thousands of dollars by combining these tax credits with a reputable HVAC installer’s expertise. The eligibility for tax credits depends on the energy efficiency ratings of the HVAC systems, such as SEER2, EER2, HSPF2, and AFUE. To claim the tax credits, homeowners must keep records, complete IRS Form 5695, and file the forms along with their federal tax returns.
The Inflation Reduction Act also offers expanded tax credits for other home systems and energy efficiency measures, such as insulation, solar panels, and Energy Star-certified windows. Homeowners must take advantage of these tax incentives before the program expires 2034. By strategically planning upgrades and working with a reputable contractor, homeowners can maximize their tax savings and achieve greater comfort and efficiency in their homes.
DOE Supporting States to Pave the Way for Upcoming Home Energy Rebates Programs
On March 23, 2023, the DOE posted an Administrative and Legal Requirements Document (ALRD) detailing how states may access funds to hire staff, prepare their workforce, and engage with constituents ahead of the forthcoming Home Energy Rebates. Funding set aside for tribal nations will be available following the completion of the ongoing tribal consultation process.
Under the ALRD, states are encouraged to apply for up to 2.5%, not to exceed $2.5M, of the total funding from each formula allocation of IRA Sections 50121 and 50122 to support administrative costs such as capacity building, strategic planning, workforce analysis, coordination across programs, and consumer outreach. These activities will help ensure state entities are able to administer successful rebate programs, making it possible for homeowners around the country to access discounts for energy-efficient upgrades and retrofits. Review the state allocations for early administrative funds.
The DOE Office of State and Community Energy Programs (SCEP), which is developing program guidance and overseeing implementation, encourages states to take this opportunity to plan program structure and align it with state and local needs and interests.
States, territories, and the District of Columbia can use the limited administrative funding for activities to include:
- Building capacity by hiring staff and third-party consultants as needed.
- Strategic planning to conduct analysis and supply chain research.
- Coordinating ways to integrate funds with existing federal or state programs.
- Forging plans for workforce development to include residential contractor training programs or developing strategies to promote equity in workforce programs.
- Identifying effective consumer outreach and communication.
Many households and families are eager to upgrade their homes with energy-efficient solutions to reduce energy bills, improve comfort and air quality, and reduce emissions. Although consumers cannot access the funding yet, home energy rebates will be available once states and territories have established their programs.
The Inflation Reduction Act (IRA) funded $8.8 billion in Home Energy Rebates, which include two unique rebate programs that state, and tribes will implement:
- The Home Efficiency Rebates Program will offer $4.3 billion in formula grants to state energy offices to assist in whole-home retrofits, such as insulation and air sealing, that will receive rebates based on their predicted energy savings and total project costs.
- The Home Electrification and Appliance Rebates Program will offer $4.275 billion in formula grants to state energy offices, as well as $225 million in grants to Indian tribes, to develop and implement discounts for high-efficiency electric home equipment and appliances. These rebates may be applied to the cost of ENERGY STAR equipment such as heat pumps for space conditioning, water heating, and clothes dryers; electric stoves and ovens; as well as electrical panel and wiring upgrades in low- and moderate-income single-family and multi-family homes.
Homeowners are also encouraged to learn more about currently available tax credits for home solar, battery storage, heat pumps, and more.
Learn more about the Home Energy Rebate Programs.
Energy efficient home improvement credits amounts and requirements
|Improvement||Available for 2022 tax year||Available for 2023-2032 tax years||Efficiency requirements|
|Biomass stoves and biomass boilers||$300||30% of costs, including labor, up to $2,000||Must meet the Consortium for Energy Efficiency’s highest tier of efficiency and have a thermal efficiency rating of at least 75%.|
|Central AC||$300||30% of costs, including labor, up to $600||Must meet the Consortium for Energy Efficiency’s highest tier of efficiency.|
|Electric or natural gas heat pumps||$300||30% of costs, including labor, up to $2,000||Must meet the Consortium for Energy Efficiency’s highest tier of efficiency.|
|Electric or natural gas heat pump water heaters||$300||30% of costs, including labor, up to $2,000||Must meet the Consortium for Energy Efficiency’s highest tier of efficiency.|
|Exterior doors||10% of cost||30% of costs, up to $250 per door, up to a total of $500||Must meet or exceed Energy Star requirements.|
|Exterior windows and skylights||10% of cost||30% of costs up to $600||Must meet or exceed Energy Star requirements.|
|Home energy audits||NA||30% of costs, up to $150||Must include a home inspection by a certified auditor, followed by a written report.|
|Insulation||10% of cost||30% of costs, up to $1,200||Must meet International Energy Conservation Code standards.|
|Natural gas, propane or oil water boilers||$300||30% of costs, including labor, up to $600||Must meet the CEE’s highest tier of efficiency.|
|Natural gas, propane or oil water heaters||$150||30% of costs, including labor, up to $600||Must meet the CEE’s highest tier of efficiency OR meet Energy Star criteria.|
|Electric panel||NA||30% of costs, including labor, up to $600||Must be installed in accordance with the National Electric Code and have a load capacity of at least 200 amps.|
What is the maximum tax credit available for my HVAC system?
The maximum tax credit you can receive for your HVAC system depends on the specific components included. For example, for a combination of heat pumps, heat-pump water heaters, and biomass stoves/boilers, the annual total limit for rebates is $2,000. On the other hand, suppose you have a mix of home energy-efficient improvements (such as windows, doors, skylights, insulation, and electrical upgrades) along with furnaces, boilers, and central air conditioners. In that case, the annual total limit for rebates is $1,200.
Are there any state or local tax credits available for HVAC systems?
Many states have implemented tax incentives and rebates to support residents in affording energy-efficient systems. To find out more about the deductions and credits you qualify for, it is recommended to browse your state’s official website.
When does the HVAC tax credit program come to an end? To fully take advantage of federal HVAC tax credits, your installation project must be completed before December 31, 2032. After that, the tax credit program expires entirely in 2034.
Please note that the content provided is for informational purposes only and should not be considered financial or tax advice. It’s always recommended to consult with a qualified tax professional or visit official sources for specific tax guidance based on your individual circumstances.
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