New Furnace Tax Credit and How to Claim It
Claiming the federal tax credit for a new furnace involves specific equipment and documentation rules. Learn the steps to ensure you meet all requirements.
Homeowners who purchase and install a new, high-efficiency furnace may be eligible for a federal tax incentive. The Energy Efficient Home Improvement Credit is designed to encourage energy conservation by reducing the tax burden for those who invest in qualifying upgrades. This credit, which was updated by the Inflation Reduction Act of 2022, provides a direct, dollar-for-dollar reduction of your tax liability.
Eligibility for the Credit
To qualify for the Energy Efficient Home Improvement Credit, the furnace must be installed in your primary residence. This means the home must be the one you live in for most of the year, as second homes or rental properties are not eligible. The property must be an existing home located within the United States, and the credit is not available for newly constructed homes.
Ownership of the property is a requirement, so renters cannot claim the credit for a furnace their landlord installs. The furnace itself must be new equipment, not used or refurbished. The unit must also be “placed in service,” meaning it is installed and ready for use, during the tax year for which you intend to claim the credit.
Qualifying Furnace Specifications and Costs
The technical specifications of the furnace are a central component of its eligibility. For natural gas furnaces, the unit must have an Annual Fuel Utilization Efficiency (AFUE) rating of 97% or higher. This rating measures how efficiently the furnace converts fuel into heat over a typical year. Specific ENERGY STAR certified oil furnaces that are rated by the manufacturer for use with certain fuel blends may also qualify.
The credit covers the cost of the furnace itself and the labor costs for onsite preparation, assembly, and original installation. This means the total amount used to calculate your credit can include both the price of the unit and the fees for putting it in place.
The credit is calculated as 30% of the total cost of the furnace and its installation, but it is capped at a maximum of $600 per year. This is an annual cap, not a lifetime limit, and it applies specifically to furnace and boiler installations. For example, if the cost of your qualifying furnace and installation was $3,000, 30% would be $900, but your credit would be limited to the $600 maximum.
Required Documentation for Your Records
Before filing your tax return, you must gather and retain specific documentation. While not submitted with your return, you must have these documents available in case the IRS requests them. The two primary documents are the purchase invoice and the Manufacturer’s Certification Statement. The invoice should clearly show the purchase date, the cost of the furnace and installation, and confirm it is new equipment.
The Manufacturer’s Certification Statement is a signed document from the maker attesting that the product model meets the tax credit requirements. This formal statement can be downloaded from the manufacturer’s website or obtained from your installer. For equipment installed in 2025, you will also need to report the item’s product identification number on your tax return. If the furnace is from a qualified manufacturer, you may be able to provide a shorter manufacturer’s code instead.
How to Claim the Credit on Your Tax Return
To claim the credit, you must complete and file IRS Form 5695, Residential Energy Credits, with your annual Form 1040 tax return. You will need the total cost of the furnace and its installation to complete this form.
On Part II of Form 5695, enter the costs for your furnace on the line designated for residential energy property costs. You will input the total amount you paid, and the form will guide you to calculate 30% of this cost.
The form has built-in limitations to apply the $600 maximum credit for a furnace. After calculating the credit amount on Form 5695, you will transfer the final figure to Schedule 3 (Form 1040), which reduces your total tax liability. This credit is nonrefundable, meaning it can reduce your tax to zero, but you will not receive any of it back as a refund.