Tax Credit for a New Furnace and Air Conditioner

Homeowners looking to upgrade their heating and cooling systems may find financial relief through federal tax incentives. The Inflation Reduction Act of 2022 expanded and renamed a tax benefit, now called the Energy Efficient Home Improvement Credit. This credit is designed to encourage the installation of higher-efficiency equipment by offsetting a portion of the cost for qualifying purchases. The credit applies to improvements made to an existing home that serves as your principal residence and is not available for new construction or for homes that are rented out or used as second homes.

Eligible Equipment and Credit Limits

The Energy Efficient Home Improvement Credit specifically covers several types of heating and cooling systems. Qualifying equipment includes central air conditioners, natural gas or propane furnaces, and electric or natural gas heat pumps. The credit amount is calculated as 30% of the total cost, which includes both the price of the unit and any expenses for installation.

There are specific caps on how much credit can be claimed. While homeowners can claim the credit for multiple improvements, the credit has a total annual limit of $3,200. There is a $2,000 annual limit specifically for electric or natural gas heat pumps, heat pump water heaters, and biomass stoves. For other improvements, such as central air conditioners, furnaces, windows, and doors, there is a separate combined annual limit of $1,200. For a new central air conditioner or a new natural gas furnace specifically, the credit is capped at $600 per item. These annual limits reset each year, replacing the previous lifetime limitation and allowing for phased improvements over several years.

Energy Efficiency Standards for Qualification

Simply purchasing a new furnace or air conditioner does not guarantee eligibility for the tax credit. The equipment must meet energy efficiency standards, which often align with specific ENERGY STAR requirements. Taxpayers should check with the manufacturer or the Energy Star website to confirm a specific product is eligible for the credit.

For central air conditioners, the system must meet or exceed specific ratings for both Seasonal Energy Efficiency Ratio 2 (SEER2) and Energy Efficiency Ratio 2 (EER2). To qualify, a split system must meet or exceed a SEER2 of 17.0 and an EER2 of 12.0. For a single-package system, the ratings must meet or exceed a SEER2 of 16.0 and an EER2 of 11.5.

Gas furnaces have their own distinct metric for qualification. To be eligible for the credit, a natural gas furnace must have an Annual Fuel Utilization Efficiency (AFUE) rating of 97% or higher. AFUE represents the percentage of fuel converted to heat for your home over the course of a year.

Required Information and Documentation

Proper documentation is necessary to claim the Energy Efficient Home Improvement Credit. Homeowners must obtain and keep itemized receipts that clearly distinguish the cost of the qualified equipment from the cost of the installation labor.

You will also need the Manufacturer’s Certification Statement. This is a signed document from the product’s manufacturer attesting that the specific furnace or air conditioner model meets the required energy efficiency standards for the tax credit. Homeowners can typically find this statement on the manufacturer’s website or included with the product packaging and should retain it for tax records.

This information is used to complete IRS Form 5695, Residential Energy Credits. The costs from the itemized receipts are entered on this form to calculate the credit amount. Beginning in 2025, taxpayers will also need to report the product’s Qualified Manufacturer (QM) identification number for the equipment on their tax return.

Claiming the Credit on Your Tax Return

Once all documentation is gathered and Form 5695 is completed, the process of claiming the credit involves integrating it into your annual tax filing. The completed Form 5695 must be submitted with your Form 1040, the main U.S. Individual Income Tax Return.

The final credit amount calculated on Form 5695 is transferred to Schedule 3 (Form 1040), Additional Credits and Payments. From Schedule 3, the amount is then carried to the main Form 1040, where it directly reduces your total tax liability.

The Energy Efficient Home Improvement Credit is nonrefundable. This means the credit can reduce your income tax liability to zero, but you will not receive any portion of it back as a refund if the credit amount exceeds your tax liability. Any unused portion of the credit cannot be carried forward to apply to a future tax year.