What HVAC Systems Qualify for Tax Credits?

Property owners and HVAC professionals should be aware of U.S. government tax incentives for specific heating, ventilation, and air conditioning installations, improvements, or updates. In this article, we provide an overview of common tax incentives and relevant dates to ensure that all parties understand their options when making decisions about necessary HVAC system upgrades.

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

The ENERGY STAR Federal Tax Credit program provided tax credits for energy-efficient home improvements, such as HVAC systems. These credits could 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 ranged from 30 percent to $5,000. This program encouraged 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 have been eligible for such benefits if placed into service in a primary residence before the end of 2025. To keep up with the latest qualifications, consult the IRS website regarding newly constructed homes and their eligibility.

As one accountant notes, it’s time to be proactive about energy tax credits, “For homeowners, the opportunity has largely passed. For builders, developers, and commercial property owners, the months ahead may represent the final chance to secure meaningful federal incentives—provided projects stay on schedule and meet all requirements.”

Interested in unlocking the potential of tax credits for your HVAC system? Read on to find out exactly what qualifies, and when. You will also learn how the transition from the Inflation Reduction Act of 2022 to the One Big Beautiful Bill Act (OBBBA) of 2025 affects tax credits for HVAC installations.

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 climate protection by reducing energy consumption. This is achieved through more efficient use and better electrification, which reduce the amount of fossil fuel burned in power plants and 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 that are in effect at the time of purchase/installation.

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

However, OBBBA terminated most of these effective December 31, 2025. Credits for qualifying projects completed before the end of 2025 may still be taken on 2025 tax returns filed in 2026.

HVAC Rating Terminology

Knowledge is power when it comes to understanding heat pump acronyms used in HVAC appliances. Here are some key terms to understand when shopping for a tax-credit-qualifying HVAC appliance before December 31, 2025:

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 winter.
EER (Energy Efficiency Ratio): his rating assesses an HVAC system’s efficiency in a home and often indicates how a new system will reduce energy costs. Installing good systems in a residence can double-dip on savings, as a homeowner can gain a tax credit and reduce their energy costs with the right 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.

As tax laws and regulations are always subject to change, these terms could become relevant again in the future.

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 required ratings to meet the energy efficiency benchmark and qualify for potential 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 the installation, up to $2,000 in ENERGY STAR tax credits, for installing new heat pumps that meet the national benchmark energy standard.
Valid From: January 1, 2023 to December 31, 2025

Again, tax credits and definitions of what qualifies are subject to change in the future, allowing heat pumps to qualify. States often have different criteria. For example, California is offering rebates ranging from $4,000 to $8,000 for the installation of heat pumps in qualifying households in 2026.

Central Air Conditioning

According to ENERGYSTAR.gov, any combination of central air conditioning systems with a SEER rating of 16 or greater qualifies 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, 2025

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 qualified for tax credits of up to $300-$2,000 and had 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, 2025

The tax credit was terminated for any units installed after December 31, 2025

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 the project cost by purchasing an ENERGY STAR-designated water heater with a UEF rating of at least 0.81.

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, 2025

Keep in mind also that some states, especially California, have banned natural gas water heaters. Aside from expiring or potential tax credits in the future, homeowners need to be aware of the phase-out of all gas appliances to meet the zero-emission requirements.

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 may be eligible for tax credits, provided that the unit is designed to use 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, 2025

Several states, including New York and California, have banned the installation of gas and oil furnaces. Others include Colorado, Maine, Maryland, Massachusetts, New Jersey, Oregon, and Rhode Island. States are generally encouraging the installation of heat pumps instead of fossil-fuel furnaces. The phase-out dates range from 2027 to 2050.

Many other states “have enacted “energy choice” laws that prevent state and local governments from regulating energy sources for businesses and homes.” The laws forbid governments from banning fossil fuel appliances, including furnaces. Accordingly, homeowners and businesses must consider potential tax credits (federal and state), which are always subject to change, along with environmental regulations, which are also always subject to change on all levels of government, when deciding what kind of equipment to use and when to purchase/install it.

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 a portion of both the materials and the installation costs associated with these renewable energy sources for purchases made between 2022 and 2025.

Although originally scheduled to expire in 2034, the credit has been terminated for any installations after December 31, 2025. Note also that the installation must have been completed by December 31, 2025 to qualify for the credit. Paying for the equipment, but not completing the installation before then, means that the credit will not be allowed.

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.

Beginning in 2025, the IRS established a requirement that equipment manufacturers obtain a PIN numberfor each eligible piece of equipment. This applies to heat pumps, water heaters, central air conditioning, boilers, furnaces, and others. The PIN number will be associated with the tax credit claim on tax returns. As the requirement is in process, homeowners must obtain a four-digit “QM” (qualified manufacturer) code from the installer and report it when they claim the tax credit.

Although it may affect businesses more than homeowners, the OBBBA also includes a provision regarding involvement by a Foreign Entity of Concern (FEOC). “An FEOC is defined as any entity that is owned or controlled by, or subject to the jurisdiction or influence of, a foreign adversary government such as China, Russia, Iran, or North Korea.” The designation of FEOC is subject to change. An HVAC project may otherwise meet all the requirements for a tax credit, but if a FEOC is involved in the supply chain, contractors, or equipment origin, the credit will not be allowed.

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 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.