On January 1, 2023, the Inflation Reduction Act went into effect, which offers energy tax credits when you file your tax return. These tax credits cover a wide range of home energy efficiency improvements, including equipment like air conditioners, heat pumps, and heat pump water heaters, as well as upgrades to the home envelope like doors, windows, insulation, etc.
Federal Tax Credit Overview
Annual Limits: 30% of the project cost up to a $3,200 annual maximum for all energy efficiency improvements claimed under this credit, subject to aggregate limits. This breaks down to:
- Up to $2,000 annual limit toward the purchase of any combination of air source heat pumps, heat pump water heaters, and biomass stoves/boilers.
- Up to $1,200 annual limit toward the purchase of any combination of central air conditioners, furnaces, boilers, plus other home envelope improvements (e.g. windows/doors/skylights, insulation. Limits on doors ($250 per door and $500 total), windows ($600) and home energy audits ($150))
- There are per-project limitations as well. For further details about tax credits for other types of energy efficient home improvements, visit energystar.gov.
Dates: Equipment must be purchased and installed January 1, 2023–December 31, 2032.
Property Requirements: Equipment must be installed in an existing home and your principal residence (the place you occupy most of the time). New construction and rentals do not apply. The principal residence must be in the United States and may be a house, houseboat, mobile home, cooperative apartment, condominium, or a manufactured home to qualify.
The credit has no lifetime dollar limit. You can claim the maximum annual credit every year that you make eligible improvements until 2033.
The credit is nonrefundable, so you can’t get back more on the credit than you owe in taxes. You can’t apply any excess credit to future tax years.
Tax Tip: To make the most of the tax credits, spread your energy efficiency improvements over a few years. The $3,200 annual limit and any aggregate limits reset each year through 2032. You can find ways to mix and match the tax credits for maximum savings by looking at your options on the ENERGY STAR website.
Air Conditioner and Heat Pump Tax Credit Details
Central Air Conditioners:
- You can claim 30% of the project cost, up to a $600 maximum credit.
- The air conditioner must meet the following efficiency requirements:
- Split Systems: ENERGY STAR certified* equipment with SEER2 ≥ 16
- Packaged Systems: All ENERGY STAR certified systems are eligible.
Air Source Heat Pumps:
- You can claim 30% of the project cost, up to a $2,000 maximum credit.
- The heat pump system must meet the following efficiency requirements:
- Ducted Split Systems: All systems that have earned the ENERGY STAR label are eligible.
- Ductless Mini-Split (Non-Ducted) Systems: ENERGY STAR certified equipment with SEER2 ≥ 16, EER2 ≥ 12, HSPF2 ≥9.
- Heat pump models with the ENERGY STAR Cold Climate* designation:
- Ducted Systems: EER2 ≥ 10
- Mini-Split Systems: SEER2 ≥ 16, EER ≥ 9, and HSPF ≥ 9.5.
Business Use of Home
If you use a property solely for business purposes, you can’t claim the credit.
If you use your home partly for business, the credit for eligible clean energy expenses is as follows:
- Business use up to 20%: full credit
- Business use more than 20%: credit based on share of expenses allocable to nonbusiness use
Frequently asked questions about energy efficient home improvements and business use of the home
Qualified Expenses and Credit Amounts
To qualify, home improvements must meet energy efficiency standards. They must be new systems and materials, not used. Some improvements have specific credit limits as follows.
Building Envelope Components
To qualify, building envelope components must have an expected lifespan of at least 5 years. Qualified components include new:
- Exterior doors that meet applicable Energy Star requirements. Credit is limited to $250 per door and $500 total.
- Exterior windows and skylights that meet Energy Star Most Efficient certification requirements. Credit is limited to $600 total.
- Insulation and air sealing materials or systems that meet International Energy Conservation Code (IECC) standards in effect at the start of the year 2 years before installation. For example, materials or systems installed in 2025 must meet the IECC standard in effect on Jan. 1, 2023. These items don’t have a specific credit limit, other than the maximum credit limit of $1,200.
Labor costs for installing building envelope components don’t qualify for the credit.
Home Energy Audits
A home energy audit for your main home qualifies for a credit up to $150.
The auditor must give you a written report listing the most significant and cost-effective energy efficiency improvements for your home with estimated energy and cost savings for each improvement. The auditor must meet certification or other requirements to be published soon by the Internal Revenue Service. Check back for guidance.
Residential Energy Property
Residential energy property that meets the Consortium for Energy Efficiency (CEE) highest efficiency tier, not including any advanced tier, in effect at the beginning of the year when the property is installed qualifies for a credit up to $600 per item. Costs may include labor for installation.
Qualified property includes new:
- Central air conditioners
- Natural gas, propane, or oil water heaters
- Natural gas, propane, or oil furnaces and hot water boilers
Oil furnaces or hot water boilers can also qualify through other efficiency criteria.
Costs of electrical components needed to support residential energy property, including panelboards, sub-panelboards, branch circuits, and feeders, also qualify for the credit if they meet the National Electric Code and have a capacity of 200 amps or more. There is a limit of $600 per item.
Heat Pumps and Biomass Stoves and Boilers
Heat pumps and biomass stoves and boilers with a thermal efficiency rating of at least 75% qualify for a credit up to $2,000 per year. Costs may include labor for installation.
Qualified improvements include new:
- Electric or natural gas heat pumps
- Electric or natural gas heat pump water heaters
- Biomass stoves and boilers
Subsidies, Rebates and Incentives
When calculating your credit, you may need to subtract subsidies, rebates, or other financial incentives from your qualified property expenses because they’re considered a purchase price adjustment.
Public utility subsidies for buying or installing clean energy property are subtracted from qualified expenses. This is true whether the subsidy comes directly to you or to a contractor on your behalf. However, utility payments for clean energy you sell back to the grid, such as net metering credits, don’t affect your qualified expenses.
Rebates are subtracted from qualified expenses if all of these apply:
- The rebate is based on the cost of the property
- It comes from someone connected to the sale such as the manufacturer, distributor, seller or installer
- It isn’t given as payment for services you provide
State energy efficiency incentives are generally not subtracted from qualified costs unless they qualify as a rebate or purchase-price adjustment under federal income tax law. Many states label energy efficiency incentives as rebates even though they don’t qualify under that definition. Those incentives could be included in your gross income for federal income tax purposes. See Notice 2013-70, IRB 2013-47.
How Do I Apply?
To claim any tax credits, file Form 5695, Residential Energy Credits Part II, with your tax return. You must claim the credit for the tax year when the property is installed, not merely purchased.
Tax credits are administered by the IRS, and the credit amounts you receive are subject to IRS regulations. Therefore, we highly recommend consulting a tax professional for advice on tax preparation and your tax credit eligibility. For more information about the tax credit, you can also visit IRS.gov.
What Other Equipment Qualifies for a Tax Credit?
Even if you don’t plan on upgrading your heating & cooling system, you might intend to purchase another qualifying household appliance like a heat pump water heater. Check the entire list of qualifying home improvements.
There are also separate tax credits available for renewable energy home improvements, like wind, solar, and geothermal. These upgrades do not count toward the $3,200 annual maximum under the energy efficiency tax credits.
The IRS also included modifications and extensions for tax credits available to home builders and commercial buildings.