Tax Credits for Replacing Heating and Cooling Systems

The Feds allow a suite of energy tax credits for heating and cooling systems and related energy-efficiency improvements.

The basics:

  • Lifetime credit max of 10% of costs, up to $500 for all energy improvements combined.
  • File IRS Form 5695 with your returns. This can be tricky, so pay attention to the details.
  • You must have installed a relevant heating and cooling system by Dec. 31, 2016.
  • Save manufacturer certifications and receipts in case you need them for filing.

Although there is a $500 overall ceiling, some improvements have individual limits below $500:

  • $50 for any advanced main air-circulating fan.
  • $150 for any qualified natural gas, propane, or oil furnace or hot water boiler.
  • $300 for any qualified item of energy-efficient building property, as specified by the IRS. In previous guidance, this category included certain approved electric and geothermal heat pumps, central air conditioning systems, and natural gas, propane, or oil water heaters.

The Energy Star sit has guidelines on what heating and cooling systems are covered. It’s your safest bet for information on which kinds of systems and individual products get you the credit.

Don’t rely solely on contractors who may not know the details of the energy tax credit program or who promise their products will get the credit in order to make a sale.

Read on to learn more.

What efficiency means to your wallet
Not all heating and cooling systems qualify for tax credit
Payback and benefits of HVAC replacement
5 must-know details before you replace HVAC

What efficiency means to your wallet

The tax credit makes it a little easier to do what you should do anyway. Upgrading yourheating, ventilation, and air conditioning (HVAC) to energy-efficient units can cut utility costs by about 20%, or $200 annually, on average.

However, you need cash to get going — these upgrades aren’t cheap. Although prices vary, keep in mind that:

  • A high-efficiency furnace starts around $3,500, including installation, estimates Corbett Lunsford, executive director of Chicago-based Green Dream Group, an energy-efficiency and eco-consulting firm.
  • A standard furnace may cost $2,400.

Not all heating and cooling systems qualify for tax credit

Not even every product with an Energy Star rating will get you the tax credit. Energy Star-rated furnaces must be more efficient than standard units, with annual fuel utilization efficiency ratings (AFUE) of:

  • 85% for oil furnaces
  • 90% for gas furnaces

AFUE ratings must be higher for credit-eligible furnaces:

  • Gas (either natural gas or propane): 95%
  • Oil: 95%

Boilers must have an AFUE of 95%.

Central air-conditioners:

Split Systems:

  • SEER>= 16
  • EER >= 13

Package systems:

  • SEER >= 14
  • EER >= 12

Note: Energy Star may update these criteria at any time, so check online before making a purchase.

Payback and benefits of HVAC replacement

It typically takes about a decade’s worth of energy savings to recoup the investment in a new HVAC system, Dream Group’s Lunsford says, though that time frame can vary greatly depending on fuel price fluctuations.

Less apparent in dollar terms — but still valuable — is the increasing comfort level in your home and lowering your household’s drain on non-renewable fossil fuels.

You’ll get a bump up in salability when you’re ready to move on, says Frank Lesh, president of Home Sweet Home Inspection Co. in Indian Head Park, Ill. That doesn’t mean adding a $5,000 furnace will add $5,000 to the sale price. Rather, potential buyers are less likely to push for repairs or negotiate a credit if the HVAC is in good shape.

But before you do, conduct an energy audit of your home. Lunsford, also manager of consumer education for the U.S. Green Building Council’s Chicago Chapter, says he rarely recommends replacing a furnace as the first step in making a home more energy efficient.

Start by sealing it against air leaks:

  • Do-it-yourself caulking and weatherstripping help, as does adding insulation in the attic.
  • Professional air sealing, which is more effective, can cost as much as $5,000 for a large house, he says.

The payoff: Energy costs should go down, and you might get by with a smaller HVAC system.

5 must-know details before you replace HVAC

1.  Heating by burning a fuel is inherently inefficient. High-efficiency furnaces have components that are better designed to get more heat out of the combustion process, Dream Group’s Lunsford says.

2.  Hire an HVAC contractor to calculate the size of the equipment needed for your home. Beware bidders who take a one-size-furnace-fits-all approach. Air source heat pumps and advanced main circulating fans may also qualify for the tax credit — check for the latest guidance.

3.  Don’t rely solely on contractors who may not know the details or who promise their products will get the credit in order to sell you a new system.

4.  Technically, you can replace either a furnace or a central air-conditioning unit and be eligible for the tax credit. Practically speaking, you’ll likely have to replace both for the A/C to qualify, says Enesta Jones, a spokeswoman for the U.S. Environmental Protection Agency.

5.  Most homes have split systems made up of an outdoor condenser and compressor that are connected to an indoor air handler that’s part of the furnace. Split systems must have a SEER rating of at least 16 and an EER rating of at least 13. The higher the rating, the more energy efficient the unit. A package A/C system, which houses all of its components outdoors, requires lower ratings.

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These articles are not intended to give legal or tax advice, and you should consult your attorney or financial advisor for additional information.

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