Federal Income Tax Credits for Energy Efficiency
Learn how making energy-efficient upgrades to your home can save you money on your taxes and future energy bills.
By Anne Fonda
In its latest budget bill, the 119th Congress has terminated the Energy Efficient Home Improvement Credit (25C), effective December 31, 2025.
A similar credit was first passed in 2005 and then renamed, increased, and extended under the Inflation and Reduction Act (IRA) of 2022. The credit includes a series of tax credits for homeowners making energy-efficient home improvements, including installing an energy-efficient HVAC system. The IRA extended the tax credits through December 31, 2032.
With the passage of the new budget, homeowners now have until the end of 2025 to take advantage of the HVAC tax credits, which include:
- $2,000 for a qualified heat pump
- $600 for a qualified air conditioner
- $600 for a qualified gas furnace
Understanding federal tax credits for energy efficiency
To qualify, the efficiency upgrades must be made on an existing home that is your main residence. Vacation homes do not qualify. Neither do commercial buildings or rental units.
The Inflation Reduction Act tax credits can be a maximum of 30% of the cost of your projects, up to a maximum dollar amount for each project. Under the IRA, the total maximum for all energy-efficient home improvements was $3,200 per year, every year, until 2032 if you install heat pump technology. Otherwise, the limit was $1,200. The new deadline to take advantage of the tax credit is December 31, 2025.
IRA-qualified projects must include products that meet the energy requirements set out in the IRA and as outlined on the ENERGY STAR website. Projects may include:
- Home energy audit
- Heat pumps, heat pump systems, water heaters, efficient AC units, and efficient furnaces/ boilers must meet the Consortium for Energy Efficiency (CEE) highest efficiency tier, not including any advanced tier.
- Biomass stoves/boilers must have a thermal efficiency rating of at least 75% (measured by the higher heating value of the fuel).
- Exterior doors must meet the applicable ENERGY STAR standard and exterior windows and skylights must meet the ENERGY STAR Most Efficient standard. Learn more about qualifying products and potential rebates for your area at EnergyStar.gov/windows.
- Insulation must meet International Energy Conservation Code standards.
- Panelboards must be installed according to the National Electric Code and have a load capacity of at least 200 amps. Must enable installation and use of other building envelope components or energy property.
These tax credits are also known as Energy Star tax credits.
Residential energy credits
In addition to the financial incentives under the IRA, homeowners can also take advantage of the modified Residential Clean Energy credit until December 31, 2025, which provides a 30% federal income tax credit for clean energy equipment, including:
- Rooftop solar panels
- Solar water heaters
- Wind turbines
- Geothermal heat pumps
- Fuel cells
- Battery storage
HVAC federal tax credits
Some of the biggest credits available are HVAC tax credits to help you heat and cool your home more efficiently. You can qualify for these credits as long as the products you install meet CEE Tier 1 Path A or Path B energy efficiency and performance requirements.
So, not only can you save on your energy bills, but the federal government helps you pay for qualified improvements!
Heat pump tax credit
By installing a qualified air source heat pump, you can qualify for a heat pump tax credit of up to $2,000. This is the largest IRA incentive for any single project. You may qualify if you’re replacing an old heat pump and installing a new one that meets the Consortium for Energy Efficiency (CEE) tier requirements in your region.
Today’s heat pumps are suitable for homes in any climate. If you’re in a northern state with frigid winters, consider a dual-fuel heat pump system. This is when you install a heat pump and gas furnace together, getting the best of both worlds as the furnace can kick on to help keep you comfortable no matter the outdoor temperature.
Air conditioner tax credit
You can earn 30% of the project cost or a maximum of $600 credit for installing a qualified AC unit. For split systems, CEE Tier 1 or higher air conditioners with SEER2 at or above 17 and EER2 of 12 are eligible. Qualified packaged systems with SEER2 of 15.2 and EER2 of 11.5 or higher are also eligible.
Furnace tax credit
You can earn 30% of the project cost or a maximum of $600 credit for installing a qualified gas furnace. CEE Tier 1 gas furnaces with AFUE at or above 97% are eligible.
Tax credits for other energy-efficient home improvements
The total tax credits you can claim for other energy-efficient home improvements we mentioned above is $1,200. But that only applies if you are not replacing your traditional split system and claiming credits for your new AC unit and furnace. This is because while heat pump technology is in its own category, the government includes an air conditioner and furnace in the same category as windows, doors, water heaters, and more.
Claiming federal tax credits for energy efficiency
The first thing to do to claim these tax credits is to keep your receipts and any paperwork your dealer/installer provides at the time of installation. You’ll need that when tax filing time arrives. For detailed information on claiming these credits, follow the links below to the IRS guides.
Tax credits will reduce your tax liability. Depending on your financial circumstances, they might result in you owing $0 in taxes. Consult a tax professional for additional assistance.
Maximizing your federal tax savings
All of these federal tax credits for energy-efficient upgrades to your home are available until December 31, 2025. That means you could budget for numerous projects and tick them off your to-do list. For instance, you could start with a home energy audit and get a tax credit of up to $150. You could then install an air source heat pump for a $2,000 tax credit. You could then claim an additional $1,050 in credits for projects such as upgrading the insulation in your attic or garage.
You may wish to consult a tax advisor for additional guidance.
Your local Trane dealer can help
With federal tax credits and utility rebates unlocking savings for homeowners, there’s no better time to explore energy-efficient upgrades for your home. Trane offers several products that qualify for the 25C tax credit. For more information on cost and energy savings, including how to take advantage of the latest rebates, visit Trane’s credits, rebates, and offers page.
Anne Fonda, Content Writer
A Content Writer with Trane Technologies, Anne Fonda researches topics and writes for Trane® and associated residential HVAC brands. She works in collaboration with Trane Technologies subject matter experts, offering easy-to-understand, informative content on complex topics. Her goal is to help consumers make informed decisions on the products and services they need.
She has written for HVAC and other service provider websites for over 16 years. Before transitioning to web content writing, Anne had a 14-year stint as an award-winning journalist. She graduated cum laude from the University of Missouri-Columbia School of Journalism.
When she’s not working, Anne enjoys playing word games, reading, gardening, spending time with family, and visiting gardens and museums.
Expert review by Josef Hejda, Electrification Commercialization Leader
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