Looking to cut energy costs while boosting your home’s comfort? The Energy Efficient Home Improvement Credit can cover up to 30% of eligible expenses, helping you save thousands of dollars on upgrades. This 2025 guide explains how the credit works, which improvements qualify, and why HVAC systems are one of the smartest ways to take advantage of these savings.
The Inflation Reduction Act expanded energy tax credits for homeowners, making 2025 a key year for maximizing savings on energy-efficient home improvements.
With the right planning—and the help of trusted professionals like Mechanical One—you can maximize your tax benefits, including energy tax credits, while improving your home’s efficiency for years to come.
Understanding the Energy Efficient Home Improvement Credit
The Energy Efficient Home Improvement Credit rewards homeowners for upgrading their primary residence with energy-saving features. It allows you to claim 30% of eligible costs, with a maximum annual credit of $3,200. There is no lifetime limit for this credit, so you can claim the maximum credit each year you make qualifying improvements. That means if you spend $10,000 on qualifying improvements, you could claim up to $3,000 back on your taxes.
Here are a few key rules to know:
- Applies to existing homes only – New construction does not qualify.
- Principal residence required – The upgrades must be made to your principal residence in the United States, where you live most of the year.
- Business use – If part of your home is used for business, the credit may apply on a prorated basis.
- Product certification – Beginning in 2025, some products will require a PIN code from manufacturers to verify they meet federal energy-efficiency standards.
Only certain qualified expenses for eligible improvements count toward the credit, and these must meet specific criteria set by the IRS.
This credit is designed to reward efficient home improvement projects that provide long-term savings, making it a win-win for your wallet and the environment. The maximum credit can be claimed each year for eligible improvements, as long as you do not exceed the annual cap.
Why HVAC Upgrades Offer the Biggest Opportunity
Heating and cooling account for a major share of home energy use, making HVAC upgrades one of the most effective—and financially rewarding—ways to take advantage of this tax credit. HVAC systems are considered residential energy property, and to be eligible for the credit, they must meet or exceed the highest efficiency tier established by the Consortium for Energy Efficiency (CEE).
Examples of qualifying property include oil furnaces and hot water boilers, provided they meet the required efficiency standards. These systems, along with other residential energy property, may qualify for energy tax credits when purchased and installed according to current regulations.
Heat Pumps: The Star of Energy Savings
Heat pumps are considered one of the most efficient heating and cooling technologies available today. Unlike traditional systems that generate heat, heat pumps transfer heat, making them far more energy-efficient.
- Tax Credit Value: Up to $2,000 annually, covering 30% of purchase and installation costs.
- Qualifying Types: Air-source heat pumps, geothermal heat pumps, and heat pump water heaters. Certain natural gas heat pumps and natural gas heat pump water heaters may also qualify if they meet specific energy efficiency standards.
- Professional Installation Required: To claim the credit, installation must be completed by a qualified professional to ensure system performance and compliance.
Not only do heat pumps lower your carbon footprint, but they also provide year-round comfort while dramatically reducing monthly utility bills.
Heat Pump Water Heaters
A growing number of homeowners are turning to heat pump water heaters as a cost-effective way to reduce energy use. These systems extract heat from the surrounding air to warm your water, using a fraction of the electricity that traditional models consume. Because water heating can account for nearly 20% of a home’s energy use, switching to this technology can deliver big savings while also qualifying for the full $2,000 tax credit.
High-Efficiency HVAC Systems
If a heat pump isn’t right for your home, other high-efficiency HVAC options still qualify. Replacing older air conditioners, furnaces, or boilers with Energy Star–certified systems can provide substantial tax savings.
- Central Air Conditioners: Can earn up to $600 in credits.
- High-Efficiency Furnaces and Boilers: Eligible for up to $600.
- Hot Water Boilers: High-efficiency hot water boilers that meet Consortium for Energy Efficiency standards and operate on natural gas, propane, or oil are also eligible for tax credits.
- Ductless Mini-Splits: Popular for homes without existing ductwork, qualifying for significant savings.
Pairing HVAC upgrades with insulation or window replacements ensures maximum efficiency and helps you make the most of your tax benefits. Additionally, consider air sealing and using air sealing materials as part of your weatherization improvements—these measures not only enhance energy efficiency and comfort but also qualify for tax credits.
Natural Gas and Efficient Upgrades
For many households, natural gas is still an important part of home comfort systems. High-efficiency natural gas furnaces, boilers, oil furnaces, biomass boilers, and water heaters can qualify for federal credits while reducing long-term operating costs.
- Installing a natural gas furnace with a high AFUE (Annual Fuel Utilization Efficiency) rating may qualify for up to $600 in credits.
- Various types of water heater, including those powered by natural gas, oil, or biomass, may qualify for credits if they meet efficiency standards. Natural gas water heaters are another option for improving efficiency and lowering monthly bills.
- When combined with insulation or smart thermostats, natural gas upgrades can help your home achieve even greater energy savings.
At Mechanical One, we not only specialize in HVAC, plumbing, and electrical—but we also handle gas upgrades, ensuring your entire system works together for maximum comfort and efficiency. Whether you choose an electric heat pump or a high-efficiency natural gas system, we can help you make the right decision for your home.
Other Qualifying Home Improvements
While HVAC upgrades are often the most impactful, several other energy efficient home upgrades can also qualify for credits as qualifying property:
- Insulation: Up to $1,200 annually for materials meeting International Energy Conservation Code standards.
- Windows & Skylights: Up to $600 in credits for Energy Star Most Efficient certified products.
- Exterior Doors: $250 per energy efficient door, up to a total of $500 annually, provided the doors meet the required energy efficiency standards.
- Biomass Stoves & Biomass Boilers: Up to $2,000 annually for models meeting emissions standards.
- Home Energy Audits: A certified audit, including a written report of recommended improvements, can earn you $150 in credits.
- Solar Water Heaters: Solar water heaters are also considered qualifying property for certain credits if they meet certification requirements.
Each of these improvements can add comfort and value to your home while working hand-in-hand with HVAC upgrades to reduce overall energy use.
Home Energy Audits and Subsidies
A home energy audit is one of the smartest first steps you can take on your journey to a more energy efficient home. Conducted by a qualified home energy auditor, this comprehensive assessment pinpoints exactly where your home is losing energy and highlights the most effective energy efficient home improvements you can make. From identifying air leaks to evaluating insulation and recommending upgrades like heat pumps, heat pump water heaters, or energy efficient exterior doors, a home energy audit provides a clear roadmap to lower your energy bill and boost comfort.
The efficient home improvement credit makes this process even more affordable, offering a federal tax credit of up to $150 for a qualifying home energy audit. To claim this home improvement credit, your audit must be performed by a qualified home energy auditor and include a detailed written report outlining recommended energy efficient upgrades. This ensures you’re not only meeting the requirements for the tax credit, but also getting expert advice on the best ways to save energy and money—whether that means installing geothermal heat pumps, upgrading to air source heat pumps, or improving your home’s insulation.
Beyond the federal tax credits, many homeowners can tap into additional subsidies and rebates from their state government or local utility company. These financial incentives can help offset the cost of energy efficient home improvements such as installing solar panels, geothermal heat pumps, or air source heat pumps. For example, you might qualify for the residential clean energy credit when installing solar panels, and also receive a state rebate for the same project—stacking your savings and making clean energy upgrades even more accessible.
To make the most of these opportunities, start by researching the specific programs available in your area. Your utility company or state energy office website is a great place to find information on current incentives for energy efficient upgrades, including rebates for water heaters, efficient windows, and more. Consulting with a qualified home energy auditor or a knowledgeable tax professional can also help ensure you’re maximizing every available tax credit and subsidy, from the efficient home improvement credit to the residential clean energy credit.
By combining a home energy audit with federal tax credits and local subsidies, you can make energy efficient home improvements more affordable and achieve significant energy and cost savings. Whether you’re considering a new heat pump, upgrading to energy efficient exterior doors, or installing solar panels, taking advantage of these resources can help you create a more comfortable, efficient, and cost-effective home. Don’t wait—schedule your home energy audit today and unlock the full potential of your energy efficient home improvement projects.
Solar Panels and Battery Storage
For homeowners interested in renewable energy, the Residential Clean Energy Credit—commonly known as the solar tax credit—covers 30% of the cost of solar panels, battery storage technology, fuel cells, and solar water heaters, as well as wind turbines and other energy storage systems installed between 2022 and 2032. Battery storage must have a capacity of at least 3 kilowatt-hours to qualify. Fuel cells and solar water heaters are also eligible for the solar tax credit if they meet federal requirements.
This credit is separate from the Energy Efficient Home Improvement Credit, meaning you can benefit from both programs if you install solar alongside other energy upgrades.
How to Claim the Credit
Filing for the Energy Efficient Home Improvement Credit is relatively simple, but proper documentation is essential.
- Save receipts and certifications from all qualifying improvements. Note that labor costs for installation—such as for doors, windows, and insulation—are generally not eligible for the credit; only the cost of qualifying products can be claimed.
- File IRS Form 5695 with your federal income tax return submitted to the Internal Revenue Service as part of your federal income taxes in the year the improvements were installed.
- Account for rebates – If you received home energy rebates or state energy efficiency incentives from your utility company or state, you may need to subtract these amounts from your total costs before calculating your credit, depending on whether they qualify as rebates or purchase-price adjustments.
The credit is non-refundable, which means it can lower your tax liability but won’t result in a direct refund. Any excess credit—amounts that exceed your tax liability—cannot be refunded or carried forward for the energy efficient home improvement credit.
Strategies to Maximize Your Tax Savings
Timing and planning can significantly increase your savings. The current energy tax credit replaces the previous nonbusiness energy property credit, offering expanded benefits and higher annual limits for qualifying improvements. Here are some strategies to consider:
- Bundle upgrades: Replace your HVAC system and upgrade your insulation in the same year to hit the maximum annual limit. Energy efficient home upgrades can reduce both heating and cooling costs, maximizing your savings.
- Spread improvements: Plan projects across multiple years to take advantage of recurring credits.
- Stack incentives: Combine federal credits with state-level programs and utility rebates. Many states offer additional incentives for heat pumps, energy-efficient HVAC systems, and solar. Be sure to check which improvements qualify for an energy tax credit and their eligibility criteria.
- Start with an energy audit: At just $150 in credits, an audit can help you identify the most cost-effective upgrades to prioritize.
By mapping out improvements over time, you can maximize your credits while continually reducing energy costs.
State and Local Incentives
Federal credits are just the beginning. Many states and utility providers offer rebates, low-interest financing, or tax breaks for efficiency upgrades. State energy efficiency incentives and home energy rebates can often be combined with federal credits to further reduce your costs. For example:
- Some states provide rebates of $500–$1,500 for high-efficiency HVAC systems.
- Utility companies often offer cash-back incentives for installing smart thermostats, efficient water heaters, or duct sealing.
- Certain municipalities even provide property tax incentives for solar installations.
These local programs, including state energy efficiency incentives and home energy rebates, can often be combined with the federal credit, stacking your savings and reducing upfront costs.
Mechanical One: Your Partner for HVAC, Plumbing, Gas & Electrical Upgrades
Taking advantage of the Energy Efficient Home Improvement Credit is easier when you have the right professionals on your side. At Mechanical One, our certified experts specialize in HVAC, plumbing, natural gas, and electrical services.
We’ll ensure your upgrades not only meet federal requirements for tax credits but also deliver maximum performance and long-term savings. Whether you’re considering a new high-efficiency HVAC system, a heat pump installation, heat pump water heaters, or gas upgrades, we can guide you every step of the way.
- Expert HVAC installation for qualifying tax credits
- Licensed professionals in plumbing, gas, and electrical upgrades
- Knowledgeable support to help you maximize available rebates and incentives
Final Thoughts
The Energy Efficient Home Improvement Credit represents a powerful opportunity to save money while improving the comfort and efficiency of your home. By focusing on HVAC upgrades like heat pumps, heat pump water heaters, and high-efficiency natural gas systems, you can capture the largest tax benefits while lowering energy bills for years to come.
With the addition of insulation, windows, and renewable energy systems, your savings potential only grows. And by partnering with a trusted provider like Mechanical One, you can feel confident that your upgrades will qualify, perform, and deliver maximum long-term value.
Call Mechanical One today at 407-404-4000 to learn more about how we can help with your HVAC, plumbing, natural gas, and electrical needs—and start your journey toward a more energy-efficient home in 2025.