To claim the federal 25C Energy Efficient Home Improvement Credit in 2026, a central air conditioner must meet ENERGY STAR Most Efficient criteria — currently 17.5 SEER2 or higher for split systems. Heat pumps qualifying as "high-efficiency" can earn a larger credit of up to $2,000 and must meet both SEER2 and HSPF2 thresholds. The credit covers 30% of the equipment and installation cost, with annual limits of $600 for ACs and gas furnaces, or $2,000 for heat pumps.
This is the most generous HVAC tax credit available to homeowners, and it resets every tax year through 2032. Here's exactly what efficiency ratings you need, how much you'll save, and how to claim the credit.
2026 Tax Credit Overview: Section 25C
The Inflation Reduction Act (IRA) of 2022 extended and expanded the Energy Efficient Home Improvement Credit (Section 25C of the Internal Revenue Code) through December 31, 2032. Key features:
The credit is 30% of qualified costs (equipment + installation labor). There's an annual aggregate limit of $3,200 across all qualifying improvements, with sub-limits by category. The credit is non-refundable, meaning it reduces your tax liability but won't generate a refund beyond what you owe. The credit resets every year, so you can claim it multiple years in a row for different improvements.
This is a tax credit, not a deduction. A $600 credit reduces your tax bill by $600 directly — dollar for dollar. A $600 deduction would only save you $600 × your marginal tax rate (e.g., $132 at 22%). Credits are far more valuable.
Exact SEER2 and Efficiency Requirements
Central Air Conditioners — Up to $600
Heat Pumps — Up to $2,000
Gas Furnaces — Up to $600
Heat pumps offer the biggest tax advantage. The $2,000 heat pump credit is separate from and in addition to the $600 limit for ACs and furnaces. If you install a qualifying heat pump, you get up to $2,000, and you can still claim up to $600 for a furnace in the same year if both are installed (e.g., a dual-fuel system). The total annual cap across all 25C credits is $3,200.
Annual Credit Limits Breakdown
The $3,200 annual aggregate breaks down into two sub-categories:
Example: Maximizing your 2026 credits
You install a qualifying heat pump ($12,000) and replace old windows ($8,000) in 2026:
- Heat pump credit: 30% × $12,000 = $3,600, capped at $2,000
- Window credit: 30% × $8,000 = $2,400, capped at $600
- Total 2026 credit: $2,600
In 2026, you replace your furnace ($6,000) and add insulation ($3,000):
- Furnace credit: 30% × $6,000 = $1,800, capped at $600
- Insulation credit: 30% × $3,000 = $900 (no sub-limit beyond the $1,200 aggregate)
- Total 2026 credit: $1,200 (hits the $1,200 "other improvements" sub-cap since no heat pump was installed that year)
Which AC and Heat Pump Models Qualify?
Rather than guessing, use the ENERGY STAR product finder to confirm a specific model meets the criteria. Here's a general guide by brand:
Central ACs Meeting 17.5+ SEER2
Heat Pumps Meeting 16+ SEER2 / 9.0+ HSPF2
How to Claim the 25C Tax Credit
Follow these steps to claim your credit when filing taxes:
Step 1: Confirm eligibility before purchasing. Verify the specific model number qualifies using the ENERGY STAR product finder or the AHRI certification directory. Get the manufacturer's certification statement — you'll need this for your tax records.
Step 2: Keep all documentation. Save the purchase receipt, installation invoice (showing labor costs separately), manufacturer certification statement, and the model/serial number plate photo. You don't file these documents with your return, but you must keep them in case of an audit.
Step 3: Complete IRS Form 5695. Use Part II of Form 5695 (Residential Energy Credits) to calculate your credit. Enter the total qualified costs (equipment + labor) and calculate 30% of that amount, subject to the applicable cap.
Step 4: Transfer to Form 1040. The credit from Form 5695 flows to Schedule 3 (Additional Credits and Payments) of your Form 1040.
Common mistakes to avoid:
- Claiming the credit for a rental property (only applies to your primary residence)
- Exceeding the annual cap and carrying excess to future years (the 25C credit does not carry forward)
- Forgetting to include labor costs (they count toward the 30% calculation)
- Installing equipment that meets ENERGY STAR but not ENERGY STAR Most Efficient criteria (the thresholds differ)
State and Utility Rebates: Stacking Savings
The federal tax credit can be combined with state incentives and utility rebates, which vary widely:
The HEEHRA program (part of the IRA) offers point-of-sale rebates for heat pumps — up to $8,000 for qualifying households. Eligibility is income-based (under 150% of area median income). These rebates are being rolled out state by state through 2026 and beyond. Check your state energy office for availability. These rebates can be combined with the 25C tax credit for significant total savings.
Special Case: Geothermal Heat Pumps (Section 25D)
Geothermal (ground-source) heat pumps qualify for the even more generous Section 25D Residential Clean Energy Credit: 30% of total system cost with no dollar cap. For a typical $20,000–$30,000 geothermal installation, that's a $6,000–$9,000 credit.
Unlike 25C, the 25D credit is available through 2032 at 30%, stepping down to 26% in 2033 and 22% in 2034. It also carries forward if you don't have enough tax liability to use it in one year.
Tax Credit vs Long-Term Savings: Total Value
To understand the full financial impact, let's look at a complete scenario:
Scenario: Replacing a 12 SEER AC with an 18 SEER2 heat pump in Charlotte, NC
- Old system: 12 SEER AC + 80% AFUE gas furnace, $1,800/year combined energy costs
- New system: 18 SEER2 / 10 HSPF2 heat pump, estimated $1,100/year energy costs
- Installation cost: $10,000
- Federal tax credit: $2,000 (heat pump qualifies for $2,000 cap)
- Duke Energy rebate: $500
- Net cost after incentives: $7,500
- Annual savings: $700
- Simple payback: 10.7 years
- 15-year net savings: $3,000+ (after accounting for upfront cost minus incentives)
Key Takeaways
- Central ACs need 17.5+ SEER2 to qualify for the $600 federal tax credit (25C)
- Heat pumps need 16+ SEER2 and 9.0+ HSPF2 to qualify for the $2,000 federal tax credit
- Gas furnaces need 97%+ AFUE (ENERGY STAR Most Efficient) for the $600 credit
- The credit covers 30% of equipment + labor costs, subject to annual caps
- Credits reset annually through 2032 — you can claim them every year for different improvements
- The $2,000 heat pump credit is separate from the $1,200 cap for other improvements
- Combine federal credits with state incentives and utility rebates for maximum savings
- Geothermal heat pumps qualify for 30% uncapped under the more generous Section 25D credit
- Always verify model eligibility using ENERGY STAR product finder before purchasing
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