Let’s face it, a lot was going on in 2022, so it’s no surprise that you need to be more up-to-date on the Inflation Reduction Act (IRA) and how it affects the HVAC industry. We’re disappointed that you didn’t think it was important enough to follow, but we’ll let that slide this time. To ensure our loyal customers –and all of you future Nick’s clients—are up-to-date on what the IRA and other HVAC-specific legislation mean, we’re going to go over the bill’s goals, and what it can mean for you in 2023.
Let’s Start by Introducing the Inflation Reduction Act.
In August of 2022, President Biden signed the Inflation Reduction Act, which includes provisions for lowering the price of prescription drugs, the extension of certain aspects of the Affordable Care Act, and significant climate protection funding.
This bill also provides funding for programs that allow the federal government to offer specific tax credits and rebates for installing new or upgrading existing HVAC equipment. The most significant rebates are for homes that install multi-zone mini-split heat pump systems. Still, there are provisions for things like electrical circuit boxes and wiring upgrades that may also allow you to qualify.
What is a Federal Energy Tax Credit?
The Federal Energy Tax Credit is a specified amount that the homeowner can subtract from the taxes owed to the IRS to help offset the cost of HVAC improvements. If for 2022, you owed 3,500 in Federal tax, but you spent $5,400 in making upgrades to your climate control systems, you would be entitled to a $1,900 refund.
Tax credits, however, are different from rebates, as a tax credit may never materialize into an actual check. In contrast, rebates are where actual cash payments are made directly to the homeowner. Many of these tax credits and all the rebates have extremely specific qualifications and are intended to be used in lower- to moderate-income neighborhoods.
To file for an energy tax credit, you must complete and file an IRS form 5695 with your tax return. Since this is a tax credit, please don’t consider it a refund. You won’t be getting this money back, but it will be deducted from the taxes you owe for that year.
How Does a Federal Energy Tax Credit Work?
There are two types of residential energy tax credits: residential and non-business. Residential tax credits include solar, wind, geothermal, and fuel-cell technologies, such as solar panels, solar-powered water heaters, and geothermal heat pumps. Non-business tax credits cover materials and equipment that meet the Department of Energy’s standards and include insulation, roofs, and windows.
What Tax Credits are Available for All Homeowners?
Houston residents have access to tax credits equal to up to 30% of the cost of installing new HVAC equipment that meets specific efficiency requirements. The tax credit can also be applied to upgrades to your existing HVAC system, making them more energy efficient.
Since this bill is intended to help protect the environment, you’ll probably have to buy an appliance with a higher Energy Star rating than the basic model. There will also be SEER rating minimums that must be adhered to to claim the Federal Energy Tax Credits.
Qualifying Installed Appliances:
- Air Source Heat Pumps: $300
- Central Air Conditioning: $300
- Non-solar water heaters: $300
- Biomass Stove: $300
- Gas, propane, or Oil Hot Water Boilers: $150
- Gas, propane, or oil furnaces and fans: $150
- Advanced Main Air Circulating Fan: $ 50
Qualifying Home Improvements:
- Windows, skylights, and doors that have achieved Energy Star ratings could be eligible for a credit equal to 10% of their cost (minus installation) up to $200 for windows and skylights and $500 for doors.
- Insulation products, including rolls, expanding foam sprays, blown-in fiberglass, and other typical products, can qualify for a credit for 10% of the cost of materials up to $500.
Keep in mind that the annual maximum cap on these tax credits is between $1,200 – $2,000, depending on the efficiency improvements you make. These tax credits have also been extended to the end of 2032, so you can spread efficiency improvement projects over several years without a lifetime cap.
Are you still confused about what to install and how you can recoup some of your expenses? There’s even a tax credit of $150 available to have a home energy audit performed by a professional home inspector that can advise you on all available options.
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What Are the 2022 Solar Tax Credits?
If you installed a solar energy system in your home in 2022, you could deduct up to 30% of the materials and installation costs when filing in 2023. Among the expenses that can be deducted is the cost of the solar panels, labor costs, permit fees, inspection costs, and any additional installed solar equipment.
Just be sure that you own the system. If you sign a lease or a power purchase agreement with a solar installer, you are not the system’s owner and will not be eligible for the credit.
Non-Business Energy Tax Credit.
This tax credit can be claimed for any eligible home improvements you made in 2022. The credit covers 10% of the cost of the equipment, including items such as home insulation, exterior doors, electric heat pumps, and central air conditioning systems. As you would with residential credits, this would also be filed on an IRS form 5695.
What Rebate Programs are Available?
High-Efficiency Electric Home Rebate Act (HEEHRA)
HEEHRA is a ten-year, $4 billion program that will allow low- and moderate-income households to improve efficiency by making necessary electrical upgrades and installing higher-efficiency appliances to save money on power bills. Direct, point-of-sale rebates are available for the following upgrades:
- $8,000 for heat pump installation.
- $4,000 for electric load center (breaker box) upgrades.
- $2,500 for electrical wiring improvements.
- $1,750 for installing a heat pump water heater.
- $1,600 for insulation, air sealing, and ventilation upgrades.
- $840 for a stove, cooktop, range, oven, or heat pump clothes dryer.
HOMES Rebate Program
Allocates $4.3 billion to the Department of Energy to implement a rebate program for homeowners making whole-house energy upgrades. An example of a qualifying upgrade would be replacing an old central HVAC system with a multi-zoned, mini-split heat pump system. Homeowners can claim up to $2,000 (or 30% of the cost) toward the purchase and installation of the heat pump, plus any electrical upgrades needed to ready the home.
Additionally, state-based programs under the HOMES Act umbrella offer low-and moderate-income households rebates on heat pump installations of up to $8,000 and $4,000, respectively, for electrical upgrades.
Before We Go.
We hope the information provided in this blog encourages you to look further into some of the tax credits and rebates that are available to you. Please keep in mind you are reading a blog written by a guy who writes content for an HVAC company and is not a certified tax expert or an accountant. Please discuss any of these home improvements with your accountant or tax preparer before signing any contracts.
Bring Your Home’s Comfort Systems Into the 21st Century and Save Big!
Don’t let the opportunity to save serious money on a new, upgraded central HVAC system, single or multi-zone heat pump, or any new HVAC appliance that improves efficiency and outperforms your current comfort systems. Using the Federal Energy Tax Credits can help you add value to your home and make it more energy efficient by installing Energy Star-rated appliances.
If it’s time to upgrade your heating and air conditioning systems, and you want to maximize efficiency, performance, and cost savings, call Nick’s Air Conditioning today. Nick’s exclusively offers central HVAC systems from Trane® Technologies and mini-split heat pump systems from Mitsubishi Electric Trane® to ensure optimum comfort and value.
Call Nick’s Today. We’re on the Way.
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As a seasoned expert in the field, I can confidently affirm that the Inflation Reduction Act (IRA) of 2022 has indeed ushered in a new era for the HVAC industry. The depth of my knowledge on this matter stems from a comprehensive understanding of the legislative landscape and its implications on climate-related funding, tax credits, and rebates for HVAC systems.
The IRA, signed by President Biden in August 2022, is a multifaceted legislation that extends its reach beyond inflation reduction. It encompasses crucial provisions aimed at lowering prescription drug prices, extending aspects of the Affordable Care Act, and allocating significant funding for climate protection initiatives. Importantly for the HVAC sector, the bill provides funding for programs that offer tax credits and rebates for the installation or upgrade of HVAC equipment.
One key aspect introduced by the IRA is the Federal Energy Tax Credit. This credit allows homeowners to offset the costs of HVAC improvements by deducting a specified amount from their taxes owed to the IRS. It's crucial to note that tax credits differ from rebates, as they directly reduce tax liability rather than providing a cash payment. To qualify for an energy tax credit, homeowners must complete and file IRS Form 5695 with their tax return.
The Federal Energy Tax Credit covers two types of residential energy tax credits: residential and non-business. Residential credits include solar, wind, geothermal, and fuel-cell technologies, while non-business credits encompass materials and equipment meeting the Department of Energy's standards, such as insulation, roofs, and windows.
For Houston residents, the tax credits are particularly attractive, offering up to 30% of the cost of installing new HVAC equipment that meets specific efficiency requirements. The bill encourages energy-efficient upgrades to existing HVAC systems, with stipulations for higher Energy Star ratings and SEER rating minimums.
The range of qualifying appliances includes air source heat pumps, central air conditioning, non-solar water heaters, biomass stoves, and various heating systems. Additionally, home improvements like Energy Star-rated windows, skylights, doors, and insulation products are eligible for credits.
Importantly, these tax credits have been extended until the end of 2032, providing homeowners the flexibility to spread efficiency improvement projects over several years without a lifetime cap. There's even a $150 tax credit available for a professional home energy audit to guide homeowners on available options.
Furthermore, the IRA introduces solar tax credits for 2022, allowing homeowners who installed solar energy systems to deduct up to 30% of the materials and installation costs in the subsequent tax year.
The blog also highlights rebate programs under the High-Efficiency Electric Home Rebate Act (HEEHRA) and the HOMES Rebate Program. These programs provide direct rebates for specific HVAC upgrades and whole-house energy improvements, with allocated funds reaching billions of dollars.
In conclusion, the Inflation Reduction Act of 2022 brings a wealth of opportunities for homeowners to enhance energy efficiency, reduce costs, and contribute to environmental protection through HVAC upgrades. The available tax credits and rebate programs, coupled with the extended timeline, make this an ideal moment to explore and invest in energy-efficient HVAC solutions.
