Important Things to Know About 2023 Tax Credits for HVAC Systems

2023 is the perfect year to upgrade the HVAC system in your Chesapeake, Virginia home. With access to a wealth of federal tax credits, you can offset the cost of this project, lower your home energy bills, and reduce your carbon footprint. However, it helps to know which incentives are applicable to the type of equipment you want and how to qualify for them. Following is everything you need to know about 2023 tax credits for HVAC systems.

The Inflation Reduction Act of August 2022

Signed in August of 2022, the Inflation Reduction Act aims to reduce inflation by curbing the national deficit, lowering the costs of select prescription drugs, and promoting the use of clean energy. For homeowners in need of new HVAC systems, this act has resulted in the addition of several impressive tax credits and the extension of tax credits already in place. As the federal government, multiple states, and many local municipalities prioritize the move away from gas-fired appliances, these credits are making it both cheaper and easier for consumers to electrify their homes.

Rebates and tax credits offered or extended under the Inflation Reduction Act apply to both the installation of brand-new HVAC equipment and the upgrade of various existing heating and cooling system types. Moreover, with the extension of existing tax credits, some homeowners are able to retroactively claim these benefits for work performed within the recent past.

What Federal Tax Energy Credits Are and How They Can Help

Federal tax energy credits aren’t money that you can use to pay for new or upgraded HVAC equipment. Instead, these are deductions that you can claim at the year’s end when filing your taxes to offset your out-of-pocket spending. For instance, if you owe $2,000 in federal taxes and claim $6,000 in qualifying HVAC replacement or improvement expenses, you may end up with a tax return of up to $4,000. If you made energy upgrades to your home heating and cooling equipment in 2022 or will be making them in 2023, and if these upgrades qualify you for a tax credit, you can claim the related deduction by completing and filing form 5695 with the IRS.

The Extension of the Tax Credit for Geothermal Heat Pump Installations

Under the Inflation Reduction Act, the tax credit for geothermal heat pump installations was extended. From 2023 to 2032, all qualifying geothermal heat pump installations will allow for a credit of up to 30% of the installation cost. However, the cap on acknowledged project costs for this credit is just $3,200. Thus, any monies spent beyond this amount will not be eligible. This includes expenses claimed for all other tax credit-qualifying energy improvements.

Homeowners can also retroactively claim this tax credit for any geothermal heat pumps installed after January 1, 2022. This applies to all units that were “placed in service” after this time. In this instance, “placed in service” indicates that the equipment was fully installed and ready to use just at or after the start of the new year. If you purchased a brand-new home on or after January 1, 2022, any qualifying HVAC system installed on your property is considered as having been “placed in service” on the date that you assumed residence.

An Overview of SEER2 Requirements and Other Federal Tax Credits

Having a geothermal heat pump installed in your home isn’t the only way to qualify for a federal tax credit under the Inflation Reduction Act of 2022. There’s also a $2,000 credit that can be applied each year for the installation of:

• Biomass stoves and boilers
• Heat pump water heaters
• Air-source heat pumps

Homeowners can also claim up to $1,200 in federal tax credits for the installation of qualifying central boilers, furnaces, and AC systems.

Qualifying equipment includes central AC systems or split AC systems with seasonal energy efficiency ratio 2 (SEER2) ratings of 16 or higher and central AC package units with SEER2 ratings of 15.2 or higher and energy efficiency ratio 2 (EER2) ratings of 11.5 or higher. For air-source heat pumps, both split and ducted systems must have SEER2 ratings of 15.2 or higher and EER2 ratings of at least 11.7. These units must additionally have heating seasonal performance factor 2 (HSPF2) ratings of 7.8 or more. SEER2 ratings for air-source heat pump package units must reach or exceed 15.2, and EER2 ratings for these same systems must be 10.6 or higher and come in conjunction with HSPF2 ratings of at least 7.2.

Mandatory AFUE Ratings for Heaters and Boilers

If you intend to install a new heater in 2023 or wish to claim retroactive credits, your gas furnace must have an annual fuel utilization efficiency (AFUE) rating of at least 97%. AFUE ratings for qualifying gas boilers must be as high as 95%. The 25C tax credit that applies to this equipment was amended in the Inflation Reduction Act to extend through December 31, 2032. This revised credit provides 30% of the installation cost or up to $600 for furnaces and boilers, and up to $2,000 for heat pumps. Moreover, gas furnace and air conditioner costs can be combined for a max credit of up to 30% of $1,200 in installation costs.

The Available Benefits Will Decline Over Time

The time to take advantage of these savings is now. Although the Inflation Reduction Act has extended certain incentives for a decade or more, the value of these credits will gradually decline over time. For instance, you’ll get a credit of up to 30% of the total installation cost for qualifying HVAC equipment through 2032, but you’ll only get 26% of applicable installation costs in 2033 and just 22% in 2034. Right now, the available credits can be used in more than one year. They can also be combined with wind and solar tax credits. You can even combine them with various energy efficiency upgrade tax credits to further optimize your savings.

Other Important Incentives to Keep in Mind

Upgrading or replacing your HVAC system in 2023 will give you access to a range of impressive savings through federal tax credits. However, it will also keep you on par with increasingly stringent legislation pertaining to carbon emissions, energy use, and fuel types. Upgrading to a heat pump will additionally lower your carbon footprint and your home energy bill. With these improvements, you and everyone else in your household can rest assured that you’re doing your part to protect the natural environment, even as your normal usage habits remain unchanged. Upgrading heating and cooling equipment can also improve your indoor air quality, minimize or eliminate the risk of carbon monoxide exposure, and create a more comfortable and enjoyable living environment all around.

One of the greatest benefits of investing in your home’s HVAC system is the ability to grow your property’s value and increase its marketability. Not only are laws pertaining to residential HVAC systems changing, but the expectations of homebuyers are changing as well. Savvy shoppers are looking for homes with modern HVAC systems that are just as efficient as they are functional. Whether you’re interested in selling your property within the near future or simply want to keep it on par with current market standards, the available federal tax credits can significantly reduce the costs of the necessary HVAC improvements.

We can help you plan for your next major HVAC project by helping you identify applicable tax credits and qualifying equipment. We offer heating, cooling, home generator, and indoor air quality services. We also provide radiant heating, water heaters, and HVAC ductwork. If you’re ready to upgrade the heating and cooling equipment in your Chesapeake, Virginia home, give Simmons Heating & Cooling a call today.