Rapidly changing rules and regulations can make it easy to miss opportunities to save your clients' bottom line.
In this article, we delve into the world of tax-deductible HVAC home improvements to help you confidently guide your customers through this aspect of their HVAC upgrade journey. We cover the latest information on what may qualify as tax-deductible HVAC home improvements and how your clients can potentially save money while improving their homes' HVAC systems. For the most updated information and guidance, do make sure to check out the IRS website.
What Are Tax-Deductible Home Improvements?
As you know, tax-deductible home improvements are upgrades to a homeowner's property that can be subtracted from their income when calculating their taxes. We asked a couple of HVAC contractors about the most frequently asked questions they get from homeowners—let’s take a look at some of them:
What Are Energy Tax Credits?
Energy tax credits are a type of tax deduction that applies to energy-efficient home improvements. These home heating credits incentivize homeowners to make energy-efficient upgrades to their homes, which can help reduce energy consumption and save money on utility bills. The Inflation Reduction Act (IRA) outlined a number of energy tax credits for the HVAC industry, which we outline below:
What’s The Inflation Reduction Act (IRA) For The HVAC Industry?
You’ve likely already heard of the Inflation Reduction Act (IRA) of 2022, a federal law emphasizing the importance of tax credits for HVAC improvements.
One noteworthy provision of the IRA is the Energy Efficient Home Improvement Tax Credit (25C). It offers tax credits to homeowners for purchasing qualifying high-efficiency HVAC systems. This includes furnaces, ACs, heat pumps, fans, and more.
Section 25D is another tax credit offered by the IRA that pertains to energy-efficient residential properties. This tax credit applies to HVAC systems that meet the program requirements.
Examples Of Tax-Deductible HVAC Home Improvements for Homeowners
So when can your clients claim home improvements on their taxes? Here are some examples of tax-deductible home improvement that contractors we’ve engaged with have provided for their clients.
Primary HVAC Home Improvements:
- Heat pump improvements: Upgrading to a more energy-efficient heat pump system.
- Water heater improvements: Installing a high-efficiency water heater, such as a tankless water heater or a heat pump water heater.
Secondary HVAC Home Improvements:
- Insulation: Adding insulation to a client’s home, such as in the attic, walls, or floors, can improve energy efficiency.
- Air sealing: Sealing air leaks in each home, such as around windows, doors, and ducts, can prevent energy waste.
- Duct sealing: Sealing and insulating ductwork can improve the efficiency of the HVAC system by reducing air leakage.
How to Claim Tax Deductions for HVAC Home Improvements
In what instances can homeowners deduct home improvements? And how can you guide them? Here are some suggestions to help your customers take advantage of Energy Efficient Home Improvement income tax credits.
Steps To Claim Federal Tax Credits For HVAC Home Improvements
Below we offer four steps to help guide homeowners:
Step 1: Determine Eligible Home Improvements
Identify the energy-efficient home improvements that qualify for the Energy Efficient Home Improvement Credit.
Eligible improvements include:
- Exterior doors (30% of costs up to $250 per door, up to a total of $500)
- Exterior windows and skylights (30% of costs up to $600)
- Insulation materials or systems and air sealing materials or systems (30% of costs)
- Home energy audits (30% of costs up to $150)
- Central air conditioners
- Specific natural gas, propane, or oil water heaters
- Specific natural gas, propane, or oil furnaces and hot water boilers
- Improvements to or replacements of panelboards, sub-panelboards, branch circuits, or feeders that are installed along with building envelope components or other energy properties listed in these FAQs and enable its installation and use.
- Heat pumps and biomass stoves and biomass boilers
- Electric or natural gas heat pump water heaters
- Electric or natural gas heat pumps
- Biomass stoves and biomass boilers
For more information on eligibility requirements, please refer to Consortium for Energy Efficiency (CEE), CEE Directory of Efficient Equipment, and Energy Star.
Step 2: Gather Documentation Of The HVAC Home Improvement
The next step for your clients is to keep records of the cost of the HVAC system and any related installation costs. This includes receipts, invoices, and any other documentation that shows the details of the HVAC system installation. It also includes the make and model of the equipment, purchase date, and installation date.
Step 3: Calculate the Tax Credit
Next, your clients can determine the eligible tax credit amount for each improvement based on the percentage of costs allowed. For example, if your client spends $1,000 on qualifying insulation materials, the tax credit would be 30% of $1,000, which is $300.
Step 4: Consider Credit Limits
As you know, homeowners may be eligible for up to $3,200 per year. The aggregate yearly tax credit maximum for all building envelope components, home energy audits, and energy property is $1,200. Electric or natural gas heat pump water heaters, electric or natural gas heat pumps, and biomass stoves and biomass boilers have a separate aggregate yearly credit limit of $2,000.
Step 5: Claim the Tax Credit
Homeowners need to include the eligible tax credit amount(s) on their federal income tax return using IRS Form 5695 (Residential Energy Credits). They should attach the completed Form 5695 to their Form 1040 or 1040-SR when they file their income tax return.
As we’re sure you’re aware, tax laws and regulations are subject to change, and it's always best to consult with a qualified tax professional. The latest guidance from the IRS will always be the best place to ensure compliance with current tax laws and regulations.
Conduit Tech's Tools for HVAC Contractors
At Conduit Tech, we focus on enabling HVAC professionals to deliver the best service to their customers, including how they can help them maximize their savings opportunities.
Our cutting-edge software generates load calculations in 15 minutes, which can be used as part of incentive applications and to help select equipment and interventions eligible for tax incentives.
Help Your Clients With Tax-Deductible Home Improvements
By showing your clients how to take advantage of energy tax credits, the IRA, and other tax deductions, you can help your customers save money on energy bills while also growing your business. And with Conduit Tech's powerful software tools, you can streamline your workflow and design more efficient HVAC home improvements. Get in touch with Conduit Tech today and take your business to the next level.