Are Energy Rebates and Tax Credits Worth Upgrading Your HVAC?
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Are you considering upgrading your HVAC? Maybe your air conditioner finally stopped working after fifteen years, or your furnace decided to go out in the middle of winter. Regardless of your reason for upgrading your HVAC system, it’s important to be aware of tax rebates for HVAC upgrades that can help lower your overall cost.
In this article, we’ll cover whether energy rebates and tax credits are worth upgrading your HVAC, including the typical cost to upgrade HVAC systems and how to claim these incentives. Remember, this article isn’t a substitute for professional advice. If you have any questions about your specific tax credit or rebate-claiming ability, reach out to a tax accountant.
What HVAC Upgrades Qualify for Federal Credits?
Not all HVAC upgrades qualify for federal credits. In fact, the IRS is very specific about which type of upgrades qualify. A tax credit for HVAC systems is available for central air conditioners, water heaters, furnaces, and hot water boilers. Furnaces, water heaters, and hot water boilers can be natural gas, propane, or oil. However, each of these types of HVAC upgrades must meet or exceed the Consortium for Energy Efficiency’s highest efficiency tier.
If your upgrades meet these requirements, you can claim a tax credit for your HVAC efficiency upgrades. The credit is a maximum of $600 per item. Let’s say that you replace your water heater and furnace in the same year. You could secure a $600 tax credit for each HVAC system or a credit of up to $1,200. The credit for HVAC upgrades is computed at 30% of the cost of installation, which includes labor and materials. Let’s say that you pay $1,750 for a new water heater. Your credit will be limited to 30% of the cost, which is $525.
Can State and Federal Rebates for HVAC Systems be Claimed Alongside Credits?
While there are few federal rebates outside of tax credits, there are a handful of state rebate programs that can further reduce the cost of your HVAC upgrades. The first type of tax rebate for HVAC is public utility subsidies. Installing clean energy property results in lower energy costs, which is attractive for utility companies. As a result, they may provide you with an incentive to upgrade in the form of a rebate. Public utility subsidies must be subtracted from your qualified expenses used to claim federal tax credits.
The next type of tax rebate for HVAC upgrades is through state energy-efficiency programs. North Carolina launched Energy Savers NC in early 2025, which provides rebates for a variety of improvements, including HVAC upgrades. These tax rebates for HVAC improvements do not impact your federal tax credit for HVAC systems. Maximizing both state and federal rebates on new HVAC systems is a great way to lower the cost of energy-efficient improvements.
What is the Typical Cost to Upgrade HVAC Systems?
The cost to upgrade an HVAC system depends on a variety of factors. For one, the size of your home will impact the type of machinery you need. For example, a 1,000-square-foot home would require a less powerful HVAC system compared to a 3,000-square-foot home. Next, the energy efficiency rating will have different prices. The highest tier of energy efficiency will come with a higher price tag compared to the lower tier. Remember, you need to be sure your equipment is eligible according to the Consortium for Energy Efficiency’s highest efficiency tier.
Other factors that influence the cost of HVAC efficiency upgrades include your location, the make and model of equipment, and the type of upgrade needed. For example, an HVAC upgrade that needs new ductwork will cost more compared to an upgrade that only needs a new air conditioning unit or furnace. Considering all of these factors, it costs an average of $5,000 to $12,500 to upgrade your HVAC.
Unlike certain energy-efficient upgrades, the entire cost of HVAC upgrades is eligible as an expense for tax rebates for HVAC systems. This includes the cost of electrical components needed, including panelboards, sub-panelboards, branch circuits, and feeders. However, these items must meet the National Electric Code and have a capacity of 200 amps or more to qualify. Similarly, labor is also an eligible expense.
How Do Tax Credits for HVAC Systems Impact Affordability?
Tax credits and rebates on new HVAC systems make upgrades more affordable. Let’s say the cost to upgrade your HVAC system is $10,000. You are replacing your furnace and air conditioner as your existing equipment is outdated. For simplicity, let’s say that $5,000 is allocated to the air conditioner and $5,000 is allocated to the furnace. Both pieces of machinery qualify for the Energy Efficient Home Improvement Credit.
First, let’s calculate your HVAC upgrade tax credit. According to Form 5695 , homeowners can take 30% of eligible home improvements up to $600 each. Taking 30% of $5,000 results in $1,500. However, since the credit is limited to $600, you will be able to take a total of $1,200 in tax credits for your HVAC upgrades.
Now, let’s say that you also qualify for the Energy Savers NC program. Under this program, rebates on new HVAC systems can reach $8,000. For simplicity, let’s say that your HVAC efficiency upgrades create a rebate of $1,000. Even though you paid $10,000 to upgrade your HVAC, your net cost is $7,800, resulting in a 22% savings.
How to Claim Credits and Rebates on New HVAC Systems
State and federal rebates for HVAC upgrades are claimed in a few different ways. First, the Energy Efficient Home Improvement Credit is claimed by filing Form 5695 on your annual tax return. The credit is available for the year you upgrade your HVAC system. For example, if you upgrade your HVAC system in 2025, you will claim the credit on your 2025 tax return.
State rebates on new HVAC systems are claimed through the North Carolina Department of Environmental Quality. You can submit a rebate application online, by phone, by mail, or through email. Remember, the Energy Savers NC program isn’t available in every jurisdiction. All counties in North Carolina are expected to be available by early 2026. Check out the North Carolina Department of Environmental Quality’s website for more information.
Summary
Taking advantage of tax rebates for new HVAC and HVAC upgrade programs are great ways to lower the cost of adding energy-efficient improvements to your home. Federal tax credits are relatively straightforward to claim and can be done with the help of a tax accountant. State rebates and incentives can be more lucrative, requiring you to work with a contractor that is licensed and registered with the North Carolina Department of Environmental Quality.
If you’ve been considering upgrading your HVAC, reach out to one of our team members today for your free quote. We can help you choose the right equipment that is eligible for federal and state incentives to lower the cost of upgrading your HVAC system.
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