All You Ever Wanted To Know About Tax Credits

By: Brian Schutt  |  March 22, 2010

Home Heating & Cooling Equipment

What are the incentives for home heating & cooling equipment?
Please note that these incentives have changed as of February 17, 2009. If you installed home envelope components between January 1 and February 16, 2009.

Purchasers of highly efficient heating, cooling, and water heating equipment can take tax credits of 30% of installed cost for purchasing qualifying equipment, as detailed below. These credits are available for systems placed in service from January 1, 2009, through December 31, 2010. There is a $1,500 cap on the credit per home, including the amount received for insulation, windows, air and duct sealing.

What types of equipment qualify?

– High-efficiency gas, oil, and propane furnaces and boilers
– High-efficiency central air conditioning units, including air-source heat pumps
– NEW – Ground-source or geothermal heat pumps
– High-efficiency fans for heating and cooling systems
– High-efficiency water heaters, including heat pump water heaters

What are the efficiency requirements to qualify for the credits?
– Manufacturers and retailers should be able to help you tell whether a specific product qualifies.

The qualification specifications are:

– Furnaces and Boilers: Natural gas & propane furnaces must meet an Annual Fuel Use Efficiency (AFUE) 95 or higher, oil furnaces and gas, oil and propane boilers must meet an AFUE of 90 or better.

– Central Air Conditioning Units: Central air conditioning units and air-source heat pumps must meet the highest tier standards set by the Consortium for Energy Efficiency (CEE) as of Janurary 1, 2009, which in most cases requires a Seasonal Energy Efficiency Ratio (SEER) of 16. SEER measures performance throughout the cooling season. More information on the CEE specification.

– Biomass Stoves: Stoves must have a thermal efficiency of 75% as measured using a lower heating value, and be used to heat a dwelling unit or heat water for use in the same. The law defines biomass fuel as anything from agricultural crops, trees, wood wastes & residues to pellets, plants, grasses and fibers.
While the new tax credit takes effect immediately, the Internal Revenue Service has not issued the guidelines for determining which stoves meet the efficiency requirements to qualify for the credit or how a manufacturer will qualify their products. These guidelines are expected by the later part of May 2009, however the credit applies to all qualifying stoves sold in 2009. Once the IRS guidelines are issued, wood and pellet stove manufacturers will test their stoves and will notify their retailers regarding which models qualify.

– Fans for heating and cooling systems: fan uses no more than 2% of total heating system energy use, as defined by DOE test procedure. For more information, see the Air-Conditioning, Heating and Refrigeration Institute web site . It is still unclear how the 2009 Stimulus legislation has impacted this incentive – it seems reasonable to assume that the cost basis will be the reasonable cost of the fan, not the entire furnace. IRS has yet to issue specific guidance on this issue.

– Water Heaters: Gas or propane water heaters—Energy Factor of at least 0.82, or a thermal efficiency of at least 90%. Heat pump water heaters—Energy Factor of at least 2.0

Where must the equipment be used?

Under guidance issued by the IRS, equipment is eligible if installed in a home occupied by a taxpayer as their principal residence at the time the equipment is installed. This implies that equipment in new homes is generally not eligible since in new homes equipment is generally installed prior to occupancy. However, efficient equipment in new homes can help that home qualify for the new home tax credit.

What do I need to do to qualify for the incentives?
Under the IRS rules, manufacturers need to certify that specific measures are eligible. Homeowners should obtain a copy of this certification when buying these products from the manufacturer, contractor or retailer. Certifications need not be submitted to the IRS, but should be kept on file in case the IRS has questions. Homeowners should also make notes on when each eligible measure is installed- only measures “placed in service” in 2009 or 2010 are eligible.

Click here to access IRS guidance on qualifying energy-efficient property.
I don’t think I qualify for the incentive – where can I find information on state-level incentives?

To apply for the incentive, use IRS form 5695. Please note that this version of the form is for 2008, and so does not include line items for the incentives discussed on this page. There will be a section for these incentives on the 2009 iteration of the form which will likely be available in late 2009 or early 2010.

All information from

HVAC Service Areas: