The Section 25C tax credit expired on December 31, 2026, but if you installed qualifying HVAC equipment before that deadline, you can still claim up to $3,200 on your 2026 tax return (filed in 2026). Section 25C — formally known as the Energy Efficient Home Improvement Credit — was the primary federal tax incentive for HVAC upgrades from 2006 through 2026. This guide covers everything you need to know: what it was, what qualified, how to file your claim, and what's replaced it in 2026.
Whether you're filing your 2026 taxes now or researching what you missed, this is the definitive reference.
What Was the Section 25C Tax Credit?
Section 25C of the Internal Revenue Code provided a nonrefundable tax credit for energy-efficient improvements to existing homes. The credit applied to equipment costs and, for some categories, labor/installation costs.
The credit went through multiple iterations over its nearly 20-year history:
| Period | Credit Rate | Max Credit | Annual Reset? | Key Notes |
|---|---|---|---|---|
| 2006–2010 | 10% (most items) | $500 lifetime | No (lifetime cap) | Original version |
| 2011–2022 | 10% | $500 lifetime | No | Extended multiple times with same structure |
| 2023–2026 | 30% | $3,200/year | Yes (annual cap) | Enhanced under IRA; terminated by OBBBA |
The Inflation Reduction Act (August 2022) dramatically improved 25C starting January 1, 2023: the credit rate increased from 10% to 30%, the lifetime cap was replaced with annual caps, and the maximum increased from $500 (lifetime) to $3,200 per year. The IRA originally authorized this enhanced credit through 2032, but the One Big Beautiful Bill Act (July 4, 2026) accelerated the termination to December 31, 2026.
25C Credit Structure: The Two Buckets
The enhanced 25C credit (2023–2026) had two separate annual caps that functioned as buckets:
Bucket 1: Heat Pumps and Heat Pump Water Heaters — $2,000 Annual Cap
| Qualifying Equipment | Credit | Per-Item Max | Bucket Cap |
|---|---|---|---|
| Air-source heat pumps | 30% of cost | $2,000 | $2,000/year |
| Heat pump water heaters | 30% of cost | $2,000 | $2,000/year |
| Biomass stoves/boilers | 30% of cost | $2,000 | $2,000/year |
Eligible costs included: Equipment purchase price plus installation/labor costs.
Bucket 2: Other Improvements — $1,200 Annual Cap
| Qualifying Equipment | Credit | Per-Item Max | Bucket Cap |
|---|---|---|---|
| Central air conditioners | 30% of cost | $600 | Combined $1,200/year |
| Gas furnaces (≥95% AFUE through 2024, ≥97% AFUE from 2026) | 30% of cost | $600 | |
| Gas boilers (≥95% AFUE) | 30% of cost | $600 | |
| Electrical panel upgrades (when supporting HP) | 30% of cost | $600 | |
| Insulation & air sealing materials | 30% of cost | $1,200 | |
| Exterior windows & skylights | 30% of cost | $600 | |
| Exterior doors | 30% of cost | $250/door, $500 total | |
| Home energy audit | 30% of cost | $150 |
Eligible costs for Bucket 2 items: Equipment costs only for most items. Labor costs were eligible for heat pump-related items, electrical work, and natural gas/propane/oil-fired equipment, but not for insulation, windows, or doors.
Combined Annual Maximum: $3,200
You could claim up to $2,000 from Bucket 1 plus up to $1,200 from Bucket 2 in the same tax year, for a maximum of $3,200.
The annual cap reset each year. Unlike the old $500 lifetime cap, the enhanced 25C allowed $3,200 every year from 2023 through 2026. A homeowner who installed a heat pump in 2023 and a new furnace in 2024 could claim both — each in its respective year. This rewarded phased upgrades.
Efficiency Requirements: What Actually Qualified
Meeting the 25C credit required more than just buying ENERGY STAR equipment. Products had to meet the Consortium for Energy Efficiency (CEE) highest efficiency tier (not including any advanced tier) in effect at the beginning of the calendar year the equipment was placed in service.
Heat Pump Qualification Standards
| Year | SEER2 Minimum | HSPF2 Minimum | EER2 Minimum | Region |
|---|---|---|---|---|
| 2023 | 15.2 (South) / 15.2 (North) | 8.1 (South) / 8.1 (North) | 11.7 | Split by region |
| 2024 | 15.2 (South) / 15.2 (North) | 8.1 (South) / 8.5 (North) | 11.7 | Split by region |
| 2026 | 16.0 | 8.5 | 12.0 | Unified (CEE removed regions) |
Starting January 1, 2026, CEE eliminated the North/South regional split and created a unified standard across the entire United States.
Central Air Conditioner Qualification Standards
| Year | SEER2 Minimum | EER2 Minimum |
|---|---|---|
| 2023 | 16.0 (South) / 15.2 (North) | 12.0 (South) / 11.7 (North) |
| 2024 | 16.0 (South) / 15.2 (North) | 12.0 (South) / 11.7 (North) |
| 2026 | 16.0 | 12.2 |
Gas Furnace and Boiler Standards
| Equipment | 2023–2024 Requirement | 2026 Requirement |
|---|---|---|
| Gas furnace | 95% AFUE | 97% AFUE |
| Gas boiler | 90% AFUE | 95% AFUE |
| Oil furnace | 85% AFUE | 85% AFUE |
The 2026 furnace threshold jumped significantly. Going from 95% to 97% AFUE eliminated many previously qualifying models. Only condensing furnaces with top-tier efficiency met the 2026 standard. If you installed a 95% AFUE furnace in 2026, it did not qualify for the 25C credit.
Additional Requirements (All Equipment)
- Both indoor and outdoor components of split systems had to be rated as a matched system with an indoor coil, air handler, and/or furnace.
- Placed in service during the tax year (fully installed and operational, not just purchased or delivered).
- Installed in your primary or secondary residence (not rental properties you own and don't occupy).
- Existing home (not new construction).
The PIN Requirement (2026 Only)
Starting January 1, 2026, the IRS required a Product Identification Number (PIN) for each item of "specified property" claimed under 25C. This was a significant new documentation requirement:
What it was: A 17-character alphanumeric code assigned by each qualified manufacturer to each individual unit of qualifying equipment they produced.
Who provided it: The manufacturer (or their authorized dealer) provided the PIN, typically on the invoice, warranty documentation, or via an online lookup tool.
How to use it: Taxpayers were required to include the PIN on IRS Form 5695 when claiming the credit. If you installed four qualifying windows, you needed four separate PINs.
Transitional provision: For equipment placed in service in 2026, taxpayers could alternatively use a QM Code (Qualified Manufacturer Code) instead of individual PINs. This was a simplified manufacturer-level identifier.
Common QMIDs (Qualified Manufacturer IDs) for major HVAC brands:
| Manufacturer | QMID |
|---|---|
| Carrier / Bryant | Varies by product line |
| Goodman / Daikin | I7Q6 |
| Mitsubishi Electric | E8X7 |
| Trane / American Standard | Varies by product line |
| Lennox | Varies by product line |
| Rheem / Ruud | Varies by product line |
If you're filing your 2026 taxes now: Contact your HVAC contractor or the equipment manufacturer to get the PIN or QMID for your installed equipment. Many manufacturers have PIN lookup tools on their websites. Without this number, your 25C claim may be rejected.
How to Claim the 25C Credit on Your 2026 Tax Return
If you installed qualifying equipment by December 31, 2026, follow these steps to claim your credit.
Step 1: Confirm Eligibility
Verify all of the following:
- Equipment was installed and operational by December 31, 2026
- Equipment meets CEE highest tier (2026 standards)
- Equipment was installed in your principal or secondary residence
- Home is an existing structure (not new construction)
- You have the manufacturer's PIN or QMID
Step 2: Calculate Your Credit
Determine which bucket your equipment falls into and calculate 30% of eligible costs.
Example calculation for a heat pump + insulation project:
| Item | Total Cost | Eligible Cost | 30% Credit | Cap | Claimed |
|---|---|---|---|---|---|
| Heat pump (equipment + labor) | $11,000 | $11,000 | $3,300 | $2,000 | $2,000 |
| Insulation (materials only) | $3,200 | $3,200 | $960 | $1,200 | $960 |
| Total | $14,200 | $14,200 | $4,260 | $3,200 | $2,960 |
Step 3: Complete IRS Form 5695
Part I: Energy Efficient Home Improvement Credit
- Line 1a: Qualified energy property costs (heat pumps, HP water heaters)
- Line 14a–14c: Calculate heat pump bucket credit (30% of Line 1a, max $2,000)
- Lines 2–6: Other qualified improvements (AC, furnace, insulation, etc.)
- Line 14d–14e: Calculate other improvements bucket (30%, max $1,200)
- Line 14f: Total 25C credit
- Line 18e: Manufacturer's product identification number (PIN)
Step 4: Transfer to Schedule 3 and Form 1040
The total credit from Form 5695 flows to:
- Schedule 3, Line 5 (Nonrefundable Credits)
- Then to Form 1040, Line 20
Step 5: Attach Form 5695 to Your Return
File Form 5695 with your federal tax return. Keep all supporting documentation (invoices, PINs, contractor receipts, AHRI certificates) for at least 3 years.
25C is nonrefundable. Your credit is limited to the amount of federal income tax you owe. If you owe $1,800 in federal taxes and your calculated 25C credit is $2,960, you'll receive a $1,800 credit. The remaining $1,160 is lost forever — it cannot be carried forward to future years (unlike the 25D credit).
Real-World Filing Examples
Example 1: Single Heat Pump Installation
David in Atlanta, GA installed a Daikin DZ20VC heat pump (SEER2 19.5, HSPF2 10.5) in September 2026 for $9,800 (equipment + installation).
| Item | Amount |
|---|---|
| Total cost | $9,800 |
| 30% credit | $2,940 |
| Annual cap (heat pump bucket) | $2,000 |
| Credit claimed on Form 5695 | $2,000 |
| David's 2026 federal tax liability | $8,500 |
| Net tax owed after credit | $6,500 |
David saves $2,000. He has $6,500 remaining tax liability, so the credit is fully utilized.
Example 2: Multiple Improvements, Tax Liability Limits Credit
Linda in Buffalo, NY is semi-retired with modest income. In 2026, she installed a heat pump water heater ($4,200) and upgraded her insulation ($2,100 materials cost).
| Item | Cost | 30% | Cap | Claimed |
|---|---|---|---|---|
| HP water heater (equipment + labor) | $4,200 | $1,260 | $2,000 | $1,260 |
| Insulation (materials only) | $2,100 | $630 | $1,200 | $630 |
| Total calculated credit | $1,890 | |||
| Linda's 2026 federal tax liability | $1,200 | |||
| Actual credit received | $1,200 |
Linda's tax liability is only $1,200, so she loses $690 of her calculated credit. This is the key limitation of a nonrefundable credit for lower-income taxpayers.
Example 3: Split System Installation — Matched System Matters
The Robinsons in Dallas, TX installed a new outdoor condenser and indoor air handler in June 2026. Their contractor installed:
- Outdoor unit: Trane XR17 (up to SEER2 17.2 in some configurations)
- Indoor coil: Basic aftermarket coil (not a Trane matched unit)
The AHRI directory shows this specific combination rates at SEER2 14.8 — below the CEE highest tier of SEER2 16.0 for 2026. Even though the outdoor unit could have rated SEER2 17.2 with a proper matched indoor coil, the Robinsons' actual installed system doesn't qualify for the 25C credit.
Lesson: Always verify the matched system rating in the AHRI directory before installation. A high-efficiency outdoor unit paired with a mismatched indoor component can drop below qualifying thresholds.
Example 4: Maximum Annual Credit Claimed
The Williams family in Denver, CO planned a comprehensive 2026 upgrade to maximize their last year of 25C:
| Item | Cost | 30% | Cap/Bucket | Claimed |
|---|---|---|---|---|
| Cold-climate heat pump | $13,500 | $4,050 | $2,000 (HP bucket) | $2,000 |
| Central AC (keeping for cooling backup) | $5,200 | $1,560 | $600 per item | $600 |
| Electrical panel upgrade | $2,800 | $840 | $600 per item | $600 |
| Total | $21,500 | $6,450 | $3,200 | $3,200 |
They hit the full $3,200 annual cap: $2,000 from the HP bucket and $1,200 from the general bucket.
What Replaced 25C in 2026?
With 25C gone, the HVAC incentive landscape has shifted:
| What 25C Provided | 2026 Replacement | Key Difference |
|---|---|---|
| $2,000 heat pump credit | HEAR: up to $8,000 (income-qualified) | Income-restricted but larger amounts |
| $600 AC/furnace credit | Utility rebates: $200–$1,000 | No federal component |
| $1,200 insulation/windows | HEAR: $1,600 insulation; HOMES: up to $8,000 | Performance-based for HOMES |
| Annual reset each year | No annual federal credits | One-time rebates from state allocation |
| Available to all taxpayers | HEAR: ≤150% AMI only | Higher-income excluded from largest rebates |
| Nonrefundable (limited by tax liability) | Point-of-sale rebate | No tax liability requirement |
| Claimed on tax return (delayed benefit) | Applied at purchase (immediate benefit) | Faster savings for homeowners |
Advantages of the New System
For low-income households, the new system is significantly better. A family earning $45,000 might have only owed $2,000 in federal taxes, limiting their 25C credit. Under HEAR, they can get $8,000+ in upfront rebates regardless of tax liability.
For all income levels, point-of-sale rebates through HEAR are more immediate than a tax credit you claim 4–16 months later.
Disadvantages of the New System
For higher-income households, the loss of 25C is painful. A family earning $200,000 could easily use the full $3,200 credit. Now, they may only access utility rebates of $500–$2,000.
For all homeowners, the patchwork state-by-state rollout creates confusion and inequity. A homeowner in Massachusetts may access $12,000+ in combined incentives while a similar homeowner in Texas has access to only $500 in utility rebates because the state program hasn't launched.
Common Mistakes When Claiming 25C
Mistake 1: Missing the "placed in service" deadline. Equipment ordered or even delivered in 2026 but not fully installed until January 2026 does not qualify. The IRS is clear: placed in service means installed and operational.
Mistake 2: Not verifying the matched system rating. Individual component specs don't determine eligibility — only the AHRI-rated matched system efficiency counts.
Mistake 3: Forgetting the PIN requirement for 2026. Without a valid PIN or QMID on Form 5695, the IRS may reject your claim.
Mistake 4: Including ineligible costs. Financing costs (interest, origination fees), extended warranties, and permit fees are not eligible for the credit. Only equipment costs and (for some categories) labor costs qualify.
Mistake 5: Claiming credit on a rental property. 25C only applied to your primary or secondary residence — not investment properties or rental units.
Mistake 6: Exceeding bucket caps without realizing. A $600 AC credit and a $600 furnace credit together count toward the $1,200 general bucket cap. You can't claim $1,200 in total from individual item caps if the bucket cap is lower.
Mistake 7: Assuming the credit is refundable. 25C reduces your tax owed but doesn't generate a refund. If you owe $0 in federal taxes, you get $0 from 25C.
Key Takeaways:
- Section 25C expired December 31, 2026. Equipment installed in 2026 does not qualify.
- If you installed qualifying equipment in 2026, claim it on IRS Form 5695 with your 2026 tax return.
- The maximum credit was $3,200/year: $2,000 for heat pumps + $1,200 for other improvements.
- Equipment had to meet CEE highest tier, and 2026 installations require a manufacturer's PIN.
- The credit was nonrefundable — limited by your federal tax liability with no carryforward.
- In 2026, state HEAR/HOMES rebates and utility incentives replace the federal credit.
- HEAR can provide larger amounts ($8,000+ for heat pumps) but is income-restricted.
- Keep all documentation (invoices, PINs, AHRI certificates) for at least 3 years after filing.
Frequently Asked Questions
Related Articles
ENERGY STAR Tax Credits in 2026: What Qualifies, What Expired & What's Still Available
NEW • 17 min read
HVAC Rebates by State: Find Local Incentives for Heat Pumps, AC & Furnaces (2026)
NEW • 18 min read
HVAC Tax Credits 2026: Complete Guide to Federal Credits, IRA Rebates & State Incentives
NEW • 19 min read