What HVAC Systems Qualify for Tax Credits?

Property owners and HVAC professionals should be aware of the tax incentives available from the U.S. government for specific heating, ventilation, and air conditioning installations, improvements, or updates. In this article, we will provide an overview of some common types of these applicable tax incentives to ensure that all parties understand their options when making decisions regarding any necessary upgrades related to HVAC systems.

Through the Inflation Reduction Act of 2022 and the Residential Clean Energy credit, the federal government is incentivizing Americans to make their homes and buildings more energy-efficient. Not only does this help reduce energy costs, but it also allows for a smoother transition towards cleaner energy sources by decreasing demand for fossil fuels.

The ENERGY STAR Federal Tax Credit program provides tax credits for energy-efficient home improvements, such as HVAC systems. These credits can be used for qualifying split systems, packaged systems, air conditioners, heat pumps, and zero-energy-ready homes. Depending on the type of improvement, tax credits may range from 30 percent to $5,000. This program encourages property owners and homebuilders to make energy-efficient upgrades.

To determine whether a new system qualifies for “high efficiency” tax credits, it’s recommended to consult an HVAC installer before purchase and installation. Heat pumps, central AC units, water heaters, and furnaces may all be eligible for such benefits when placed into service in a primary residence by the end of the year. To keep up with the latest qualifications, consult the IRS website regarding newly constructed homes and their eligibility.

Interested in unlocking the potential of tax credits for your HVAC system? Read on to find out exactly what qualifies.

Look for the ENERGY STAR Label

Whether shopping independently or through an HVAC contractor, look for an ENERGY STAR label before purchasing. ENERGY STAR is a set of government-backed programs and price tags designed to help consumers save money and reduce greenhouse gas emissions by identifying energy-efficient products and buildings.

The Environmental Protection Agency’s ENERGY STAR program promotes the protection of our climate by reducing energy consumption. This is achieved through more efficient usage and better electrification, which lessens fossil fuels burned in power plants and decreases the amount of natural gas burned in homes, businesses, and industrial sites. In addition, HVAC appliances sold with an ENERGY STAR label are eligible for tax credits.

Unless otherwise specified, most of the tax credits mentioned in this article apply to ENERGY STAR-designated HVAC appliances purchased and installed from January 1, 2023 to December 31, 2032.

HVAC Rating Terminology

Knowledge is power when it comes to knowing heat pump acronyms related to HVAC appliances. Here are some key terms to understand when shopping for a tax-credit-qualifying HVAC appliance:

HSPF (Heating Seasonal Performance Factor): This looks at if a heat pump is performing at the right level for heating, particularly during cold snaps and the winter.
EER (Energy Efficiency Ratio): This rating looks at an HVAC system’s efficiency within a home and often shows how a new system will reduce energy costs. Installing good systems within a residence can double dip in savings, as a homeowner can gain a tax credit and reduce their energy costs with the suitable systems.
SEER (Seasonal Energy Efficiency Ratio): Similar to the EER rating, but focusing on seasonal efficiency changes.
Uniform Energy Factor (UEF): A basic rating for an HVAC appliance’s efficiency within a home. The higher the number, the better the system is.
Annual Fuel Utilization Efficiency (AFUE): A measurement of how efficiently a particular heating system converts fuel into energy, expressed as a percentage. Higher AFUE ratings translate to energy cost savings.

Heat Pumps

Heat pumps provide an excellent way for homeowners to save energy and decrease their carbon footprint. As an all-inclusive solution, these systems often include components of air conditioning units, furnaces, and heaters in one package or split form, making them incredibly efficient.

Below are the needed ratings to clear the energy efficiency benchmark and receive the tax credits.

Ducted & Ductless Heat Pumps with an ENERGY STAR Designation
- SEER2 – Greater than or equal to 16
- EER2 Greater than or equal to 12
- HSPF2 Greater than or equal to 9
Ducted & Mini Split Heat Pumps with an ENERGY STAR Cold Climate Designation
- Ducted with:
  - EER2 – Greater than 10
- Mini-splits with:
  - SEER2 – Greater than 16
  - EER2 – Greater than 9
  - HSPF2 – Greater than 9.5

Although these ratings should be available to see when purchasing a new heat pump, check with your HVAC installer to ensure that your exact system matches the needed ratios and ratings.

Tax Credit: Homeowners may receive 30 percent of the total cost of what was paid, up to $2,000 in ENERGY STAR tax credits for installing new heat pumps that match the energy standard for the national benchmark.
Valid From: January 1, 2023, to December 31, 2032

Central Air Conditioning

According to ENERGYSTAR.gov, any combination of central air conditioning systems with a SEER rating of 16 or greater can qualify for a 30 percent project cost tax credit with no cap.

Tax Credit: In the United States, homeowners may be eligible to receive up to $600 in ENERGY STAR tax credits when they purchase a new air conditioner that meets specific energy efficiency ratings
Valid From: January 1, 2023 to December 31, 2032

Water Heaters

Want a hot shower, good water for cleaning, and a house that isn’t freezing? Let’s update that water heater. Two general types are under the tax credit:

Electric Heat Pump Water Heaters
Natural Gas Water Heaters (storage and tankless)

Electric and gas-powered water heaters qualify for tax credits of up to $300-$2,000 and have one requirement: Uniform Energy Factor (UEF). The higher the UEF, the more energy efficient.

Electric Heat Pump Water Heaters

Electric heat pump water heaters are an energy-efficient and cost-saving choice for many households. These models use up to 60 percent less energy than traditional electric water heaters, have higher energy factors than any other electric storage water heater and require less maintenance.

Tax Credit: Electric-powered heat pump water heaters with an ENERGY STAR designation are eligible for a $2,000 tax credit or 30 percent of the project cost
Valid From: January 1, 2023 to December 31, 2032

Natural Gas Water Heater

Natural gas water heaters are among the most energy-efficient and cost-effective options for hot water in many homes. Homebuyers can receive up to $600 or 30 percent of a project cost by purchasing an ENERGY STAR-designated water heater with an energy efficiency UEF rating of at least 0.81 or higher.

Here are the UEF rating minimums for natural gas water heaters:

Gas Storage Water Heaters: for ENERGY STAR certified models: > 0.81 UEF for tanks less than 55 gallons and > 0.86 UEF for tanks greater than or equal to 55 gallons
Tankless Gas Water Heaters: for ENERGY STAR certified models: with > 0.95 UEF

These water heaters typically have high-efficiency ratings due to their combustion chamber and sealed combustion system, designed to extract more energy from the fuel and minimize energy loss.

Tax Credit: Natural gas water heaters with an ENERGY STAR designation are eligible for a $600 tax credit or 30 percent of the project cost.
Valid From: January 1, 2023 to December 31, 2032

Natural Gas & Oil Furnaces

Although gas furnaces are more common in certain parts of the US, they may not be eligible for a tax credit. Yet natural gas furnaces with an AFUE rating of at least 97 percent can qualify for tax credits.

Additionally, oil furnaces with an ENERGY STAR certification can be eligible for tax credits, provided that the unit is made to be used with at least 20 percent of a fuel blend composed of biodiesel, renewable diesel, or second-generation biofuel. To qualify for the credit, the manufacturer must have rated these units for this purpose.

Tax Credit: Natural gas and oil furnaces with ENERGY STAR designations are eligible for a $600 tax credit or 30 percent of the project cost.
Valid From: January 1, 2023 to December 31, 2032

Residential Clean Energy Credit

The Residential Clean Energy Credit allows homeowners to receive up to 30 percent income tax credit for clean energy HVAC appliances. This includes the cost of installing and purchasing:

This tax credit applies to existing or newly constructed homes used as principal residences.

To be eligible for the Residential Clean Energy Credit, the energy-efficient equipment must meet specific energy efficiency standards and other requirements. The income tax credit covers both the materials and the installation costs associated with these renewable energy sources for the following years and percentages:

Purchases made through 2023: 30 percent
Purchases made in 2033 and 2034: 22 percent

Applying for ENERGY STAR Tax Credits

When purchasing HVAC appliances and services, ask the seller or the installer for more information before buying, and receive a receipt as proof of purchase to take advantage of ENERGY STAR tax incentives.

To apply for ENERGY STAR tax credits, homeowners must install products certified by ENERGY STAR by an EPA-qualified HVAC technician. These certified products meet specific energy efficiency standards and have been independently tested to qualify.

Homeowners must then file Form 5695 (for 2022) with their annual federal tax return, where they can receive a tax credit in a fixed amount or a percentage of work performed for their qualifying purchase. The form must be filed the same year the HVAC appliances and installation services were purchased. Homeowners can also look into other state and local incentives when installing an energy-efficient product.

Please consult a tax professional for the most up-to-date tax advice.

Nathan Stevens

Nathan Stevens is a reporter, musician, and native Texan living in Austin. He received his degree in journalism from the University of Oregon and has worked in broadcast for over a decade. His website, the2010s.net, is a collection and retrospective of the best music of the 21st century.