Cashing in on the 25C tax credit
What is the 25C tax credit?
The 25C tax credit provides a 30 percent tax credit for heat pumps and heat pump water heaters up to the cap of $2,000. It also includes up to $1,200 for other eligible upgrades (see “Other eligible upgrades” below) on an annual basis, for a maximum total tax credit of $3,200 each year.
Let’s say the invoice for a qualifying heat pump is $10,000. Since 30% of $10,000 is $3,000, your tax credit would be the maximum value: $2,000. If you purchase a qualifying heat pump water heater for $3,000, you’d receive a tax credit of $900 because 30% of $3,000 is $900.
About tax credits
Tax credits reduce the amount of federal taxes you need to pay, or can increase the size of the refund you receive if you have already had taxes withheld. The 25C tax credit can reduce your total federal income taxes by up to $3,200 per year (or equal to the amount of federal income tax you pay, if that amount is less than $3,200).
Other eligible upgrades
The 25C tax credit also covers other electrification upgrades beyond heat pumps and heat pump water heaters, including electrical panel upgrades, select weatherization measures, and energy audits. It provides up to $1,200 for these other upgrades each year, with additional credit limits shown in the table above. You can learn more about these and other tax credits for clean energy purchases at the IRS website.¹
How to tell if equipment is eligible for 25C
25C is designed to incentivize high-efficiency equipment.² Efficiency standards and ratings can be difficult to evaluate, so your best bet is to ask your contractor if your project qualifies for 25C. Some manufacturer websites list tax-credit-eligible equipment, as does the Energy Star Product Finder.³ When claiming the credit, you can rely on the manufacturer’s certification, in writing, that a product qualifies. Keep this certification for your records.
How to claim the 25C tax credit
To claim your 25C tax credit, you or your accountant will need to complete the Internal Revenue Service (IRS) Form 5695⁴ when you file your taxes for the year your project was installed. For heat pumps and heat pump water heaters, the 25C tax credit is calculated based on your full cost, including installation, so be sure to save your invoice. The IRS provides further instructions here.
You must use the current version of Form 5695 for the tax year in which you are filing. Updated forms are typically released in January or February before taxes are due in April.
1. See https://www.ahrinet.org/certification/cee-directory for a list of qualifying heat pumps and heat pump water heaters.
2. See https://www.ahrinet.org/certification/cee-directory for a list of qualifying heat pumps and heat pump water heaters.
3. https://www.energystar.gov/productfinder/
4. https://www.irs.gov/forms-pubs/about-form-5695
5. https://www.irs.gov/instructions/i5695
Disclaimer: The information presented here is for educational and informational purposes only. It is not intended to provide specific tax guidance. We suggest that you consult with your tax advisor regarding your individual tax situation.
Frequently Asked Questions
Does 25C reduce upfront costs for consumers
No, but it does reduce total costs. 25C is a federal tax credit, and it is claimed when filing your taxes.
When is 25C available?
Now! 25C became available for projects installed on or after January 1, 2023, and it will remain available through 2032.
Who qualifies for 25C?
Any resident who pays federal income taxes and purchases a qualifying electrification upgrade can qualify for 25C.
Can 25C stack with other incentives?
Yes! 25C can be combined with other federal incentives or with state, local, or utility incentives. The tax credit is usually applied to the net cost of qualifying equipment and upgrades (i.e., the cost to the customer after applicable state or utility incentives).
Does 25C include electrical panel upgrades?
25C includes panel upgrades if they are installed in conjunction with and enable the installation of a qualifying heat pump or heat pump water heater.
Does 25C have efficiency requirements?
Yes. 25C is applicable only to heat pumps and heat pump water heaters that meet the Consortium for Energy Efficiency’s highest non-“advanced” tier. Doors, windows, and insulation have additional efficiency requirements.
What does it mean that 25C resets every year?
Households can claim 25C for multiple upgrades over multiple years. For example, if a household maxes out 25C in one year by claiming a $2,000 credit for a heat pump and a $1,200 credit for insulation, that household can utilize 25C again in a future year for a heat pump water heater and an electrical panel upgrade.