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 Federal Tax Credits for Residential Energy Efficiency

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.

February 8, 2024

The Inflation Reduction Act (IRA) of 2022 provides powerful financial incentives for American homeowners to make energy-efficient upgrades to their homes. To encourage us all to transition to cleaner energy sources and reduce energy consumption, the IRA provides the Energy Efficient Home Improvement Credit (25C) you can use to help reimburse you for the cost of these home improvement projects.

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. The total maximum for all energy-efficient home improvements is $3,200 per year, every year, until 2032.

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
  • Air source heat pump installation
  • Heat pump water heaters
  • Air conditioner replacement
  • Furnace replacement
  • Insulation upgrades
  • Installation of energy-efficient windows and doors
  • Natural gas water heaters (tankless included)

These tax credits are also known as Energy Star tax credits.

Residential Energy Credits Extended

In addition to the financial incentives under the IRA, homeowners can also take advantage of the modified and extended Residential Clean Energy credit, 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 

These residential energy credits are good through 2032, stepping down to 22% for 2033 and 2034.

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 are qualified through ENERGY STAR® and meet certain 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, ENERGY STAR-certified air conditioners with SEER2 at or above 16 are eligible.  All ENERGY STAR-certified packaged systems 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. ENERGY STAR-certified 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 every year until 2032. That means you could budget for numerous projects, and tick them off your to-do list over the next few years. And, if your projects qualify, you could claim a maximum of $3,200 each year. There is no lifetime dollar limit.

For instance, this year 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.

Next year, you could install a heat pump water heater for a credit of $2,000. You could also get a tax credit of $1,200 for installing a qualifying sliding glass door for your patio. The list of projects goes on until 2032.

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.

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