Heating and Cooling Tax Credits & Rebates: Save on New Energy Efficient HVAC Systems

8 minute read Graham Lumley Last update September 2023

Save on New HVAC Systems with Tax Credits

Let’s start with some facts:

  • In Texas, air conditioning and heating can be responsible for 35-40% of your electricity bill.
  • New air conditioners can use 50% less energy compared to the systems from the 1970s and between 20-40% less energy than a system that’s 10 years old.

Those are great reasons to invest in a new energy efficient HVAC (heating, ventilation, and air conditioning) system – you can lower your bills! However, installing and upgrading HVAC systems can be expensive. That’s why the government offers HVAC tax credits to promote the adoption of more energy-efficient and environmentally-friendly technologies.

What is an HVAC Tax Credit?

An HVAC tax credit allows taxpayers to subtract a specified amount directly from their tax liability, reducing the total taxes owed. Under the Inflation Reduction Act (IRA) of 2022, the US Department of Energy sets specific requirements for covered expenses, typically offering a dollar amount or percentage discount for: 

  • Air conditioner tax credit – $300 for ENERGY STAR rated systems.
  • Boiler and new furnace tax credit – $150 for ENERGY STAR rated systems.
  • Heat pump tax credit – $300 for ENERGY STAR rated systems.
  • Insulation improvement credit – up to $500 (not including installation costs).

Why Does the Government Offer HVAC Tax Credits?

There are several factors driving the federal HVAC tax credit and rebate scheme. 

  • Energy conservation and reduced emissions – The primary reason behind federal rebates for HVAC improvements is to promote energy conservation and reduce greenhouse gas emissions. 
  • Encouraging economic growth and job creation – The more people take advantage of residential credits, the bigger the demand for energy-efficient equipment and related services. 
  • Decreased reliance on fossil fuels – Newer HVAC systems utilize advanced technologies that reduce the dependence on fossil fuels to help mitigate air pollution and climate change.
  • Long-term cost savings for taxpayers – HVAC tax credits incentivize taxpayers to invest in high-efficiency equipment, which reduces operating costs over the lifespan of the system.

Are You Eligible for HVAC Tax Credits?

HVAC tax credits have emerged as a powerful incentive for individuals and businesses to invest in energy-efficient heating, so understanding the eligibility requirements and criteria is essential.

General Eligibility Requirements

Typically, any home or business owner in the United States who has installed an energy-efficient HVAC system in their primary residence or business can apply. However, several pieces of specific criteria establish eligibility for energy efficient HVAC tax credit.

Specific Criteria for Different Types of HVAC Systems

Your ability to claim heat pump, boiler, furnace, or AC tax credits will be based on compliance with the following criteria:

  • Purchase and installation dates – In most cases, the equipment must have been purchased and installed within a specific timeframe. However, extensions often apply. For example, under the IRA, tax credit for air conditioners in 2021 was extended to include a tax credit for HVAC replacement in 2022. 
  • Energy efficiency standards – HVAC systems must meet specific energy efficiency standards measured using industry-recognized metrics – like Seasonal Energy Efficiency Ratio (SEER) in the case of AC tax credit and Annual Fuel Utilization Efficiency (AFUE) for boiler or furnace tax credit. 
  • Manufacturer certification – To be eligible for AC, boiler, furnace, or heatpump tax credit, equipment must be certified by recognized authorities, so manufacturers usually provide certification labels or eligibility documentation.

How to Determine If Your System Qualifies

The exact systems or improvements eligible for HVAC energy credit can vary year by year, so it’s essential to reference the latest IRS regulations or consult a tax professional.

hvac system outside of home in texas

Types of HVAC Tax Credits and Other Ways to Save

In addition to the federal tax credit, HVAC discounts are also available through various statewide programs – and sometimes even through manufacturers and energy companies directly. 

Federal Tax Credits

Under the IRA, Texans can use federal rebates for HVAC under the following schemes:

  • Energy Efficient Home Improvement – Homeowners can deduct 30% of the cost of some home improvements that increase energy efficiency. Specific examples include using federal tax credits for heat pump and boiler/furnace upgrades, insulation improvements, and installing energy-efficient ac units. The tax credit may also be used by households that install smart thermostats.
  • Residential Clean Energy – This additional 30% tax deduction is aimed at people interested in switching to solar energy or adding battery storage to their properties to reduce the demands on local power grids.

State and Local Tax Credits

Many states and local governments offer their own HVAC tax credits to encourage energy-efficient practices within their jurisdictions. Currently, Texas does not provide any specific state-wide incentives other than compliance with federal rebates for HVAC. 

Manufacturer and Electricity Company Rebates

Electricity bills are typically high across Texas due to reliance on air conditioning. Reliable energy plans from local suppliers like BKV Energy offer cost-effective solutions. In addition, some HVAC manufacturers and energy companies offer rebates to promote their energy-efficient products and services.

Financing Plans

If the cost to install a new system is still too high with the federal tax credits and rebates, you can explore financing options. Ask your local heating and cooling contractors if they offer financing for new systems, but make sure to find a plan with a low interest rate.

How to Apply for HVAC Tax Credits

Whether you plan to claim a federal tax credit for insulation or new equipment, the process you’ll need to work through is the same.

Gathering the Necessary Documentation

To claim back your federal HVAC tax credit, you’ll need to keep hold of your purchase and installation receipts and have a copy of the manufacturer’s certification statement to prove the efficiency ratings of the system. Otherwise, you won’t qualify. Then, you’ll need to download IRS Form 5695

Filing Your Tax Return

You’ll need to submit IRS Form 5695 with your annual tax return. You ensure you complete it accurately, follow the Form 5695 instructions carefully:

  • If you’re applying for energy-efficient air conditioner tax credit or water heater/heat pump energy credit, input a maximum value of $300 in line 22a (Energy Efficient Building Property), and re-enter the same figure on lines 23, 24, and 30. 
  • If you’re applying for a boiler or furnace tax credit, input a maximum value of $150 in line 22b (Qualified natural gas, propane, or oil furnace or hot water boiler), and re-enter the same figure on lines 23, 24, and 30.
  • If you’re applying for a tax credit for a new furnace and air conditioner bundle, input a maximum value of $300 in line 22a, a maximum value of $150 in line 22b, then a maximum value of $450 in lines 23, 24, and 30. 

Claiming Your Credit

To ensure you receive your tax credit, HVAC paperwork must be filed before the annual Tax Day deadline in April (unless you have an approved extension until October). Late filings may result in the loss of federal HVAC tax credit eligibility.

HVAC Tax Credits and Energy Efficiency

Financial incentives encourage all participants in the energy supply chain to adopt and invest in more eco-friendly practices:

  • Consumers – The HVAC tax credit helps offset the cost of purchasing and installing energy-efficient equipment, making it more affordable and accessible. Plus, customers can benefit from reduced energy bills, enhanced indoor comfort, and a decreased environmental footprint.
  • Manufacturers – HVAC tax credits drive innovation and investment in research and development for more energy-efficient HVAC technologies. 
  • Electricity providers – By encouraging energy-efficient practices, energy companies can balance energy supply and demand, reduce strain on the grid, and enhance the overall sustainability of their operations.

How Can HVAC Tax Credits Help Improve Energy Efficiency?

Energy-efficient HVAC tax credit incentives change energy consumption patterns in three significant ways:

  • Market transformation – Offering tax credits for heat pumps, new furnaces, AC units, etc., stimulates demand for energy-efficient systems, making them the norm rather than the exception.
  • Accelerated Replacement – HVAC tax credits encourage customers to replace old, outdated, and inefficient systems earlier than they would otherwise, leading to immediate energy savings and environmental benefits.
  • Upgrade incentivization – The possibility of receiving tax credits for new furnace, heat pump, insulation, and AC investments pushes customers to choose higher-efficiency options.

Understanding SEER, EER, and AFUE Ratings

To determine what HVAC systems qualify for a tax credit, you’ll need to wrap your head around a few energy rating acronyms:

  • SEER (Seasonal Energy Efficiency Ratio) – SEER is a rating used to measure the efficiency of equipment for heat pump and air conditioner tax credit, with higher SEER ratings indicating better energy efficiency. SEER calculations measure the cooling output divided by the electricity consumed over a typical cooling season. 
  • EER (Energy Efficiency Ratio) – EER is another rating used to establish suitability for AC tax credit. It’s similar to SEER, but calculated based on a constant indoor and outdoor temperature to provide a measure of efficiency under specific operating conditions.
  • AFUE (Annual Fuel Utilization Efficiency) – AFUE is a rating used to establish compliance with boiler and furnace replacement tax credit, with higher AFUE ratings signifying greater energy efficiency. AFUE calculations measure the percentage of fuel converted into usable heat over a season. 

The Impact of HVAC Tax Credits on the Environment

By encouraging individuals and businesses to adopt sustainable practices in their daily operations, AC, furnace, and heat pump tax credit schemes promote a cultural shift towards a more eco-friendly way of life, helping us all to make more environmentally conscious choices. 

Reducing Energy Consumption

HVAC tax credits encourage homeowners and businesses to invest in technologies that operate more efficiently and effectively, which results in:

  • Increased energy savings – Efficient HVAC systems consume less energy, resulting in reduced demand for electricity which translates directly to lower carbon emissions – especially from fossil fuel-based power plants.
  • Lower carbon footprints – By choosing energy-efficient HVAC systems, individuals and businesses contribute to the collective effort to combat climate change and decrease the environmental impact of energy production and consumption.
  • Improved peak load management – Efficient systems consume less energy to provide the same level of heating or cooling, helping utility companies manage peak demand periods more effectively.

Limiting Greenhouse Gas Emissions

Greenhouse gases, such as carbon dioxide (CO2), methane (CH4), and nitrous oxide (N2O), trap heat in the Earth’s atmosphere, leading to a rise in average global temperatures. By promoting the adoption of energy-efficient systems, HVAC tax credits contribute to the reduction of greenhouse gas emissions in several ways: 

  • Reduced fossil fuel consumption – Because they use less fossil fuel, Energy-efficient HVAC systems reduce combustion-related emissions of CO2 and other greenhouse gases.
  • Improved air quality – Advanced filtration and ventilation technologies improve air quality by reducing the volume of pollutants and allergens.
  • Transition to renewable energy – Some energy-efficient HVAC systems can use renewable energy sources, further reducing reliance on fossil fuels and associated greenhouse gas emissions.
  • Improved efficiency – Energy-efficient AC units cool indoor spaces more efficiently, reducing the need for prolonged cooling cycles, which give off more emissions. 

Future of HVAC Tax Credits

The future of HVAC tax credits is closely tied to the US government’s ongoing commitment to mitigating the impacts of climate change and promoting sustainable energy practices. America is aiming to achieve 100 percent carbon pollution-free electricity by 2035. To do this, there will likely be ongoing changes to criteria when you apply for tax credits for air conditioners, boilers, furnaces, heat pumps, etc. 

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Predicted Changes in Policy

Change is likely to be driven by three key factors: a push toward renewable and transition fuels, and the integration of smart HVAC systems:

  • Increasing emphasis on renewable energy – Higher federal tax credit percentages or additional incentives may be introduced for systems powered by solar, geothermal, or other renewable technologies.
  • A focus on transition – Additional incentives may be available for switching to natural gas, which is a cleaner-burning fossil fuel compared to coal and oil, acting as a bridge fuel in the transition towards a low-carbon economy. 
  • Smart HVAC systems integration – Future HVAC tax credits may incorporate incentives for using smart HVAC systems that automate setting adjustments to optimize energy use based on occupancy, weather conditions, etc.

Impact of Climate Change Initiatives

Climate change initiatives could lead to the amalgamation of various incentive programs like HVAC tax credits, renewable energy incentives, and energy efficiency rebates. An integrated approach may provide more comprehensive support for individuals and businesses to make sustainable choices. It’s also likely that as technology advances, the government will introduce stricter standards for HVAC systems, raising the bar on eligibility for tax credits for energy-efficient furnaces, heat pumps, AC units, etc.. 

The Importance of Taking Advantage of HVAC Tax Credits

There are numerous consumer benefits to taking advantage of HVAC tax credits, making it a compelling decision from both financial and environmental standpoints:

  • Cost savings – HVAC tax credits help reduce upfront investment costs and enhance the return on investment by shortening the payback period through reduced energy bills.
  • Enhanced comfort – Energy-efficient HVAC systems regulate temperature more effectively, creating more comfortable living and working environments.
  • Increased property value – HVAC upgrades can increase the resale value of a property. 
  • Environmental responsibility – Customers who actively contribute to reducing their carbon footprint positively impact the planet for future generations. 

Frequently Asked Questions

When does the HVAC tax credit end?

Currently, federal HVAC tax credit can be claimed on systems purchased and installed between 2023 and 2034. However, it’s essential to keep track of legislative updates, as the government may extend or modify credit periods to encourage ongoing energy efficiency efforts. 

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

Provided that the HVAC system in question has a SEER rating of 16 or higher or an AFUE rating of 95% or higher:

  • The maximum tax credit for a new AC unit is $300
  • The maximum tax credit for heat pumps is $300
  • The maximum tax credit for new furnaces and boilers is $150

Can HVAC tax credits be combined with other energy efficiency tax benefits?

Yes. HVAC tax credits can typically be combined with other energy efficiency tax benefits. However, the specifics may vary depending on the regulations of individual programs, so it’s advisable to check with a tax professional or the respective agencies for accurate information.