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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.

How Does a Federal Energy Tax Credit Work?

New York 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.