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Arizona Energy Tax Credits for HVAC & Home Upgrades: FAQs

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What is the Energy Efficient Home Improvement Credit (§25C)?

such as qualifying HVAC equipment and certain electrical upgrades, as well as some building-envelope improvements (like windows/doors/insulation). Starting in 2023, the credit is generally 30% of eligible costs with annual (not lifetime) caps, and it applies to qualifying property placed in service on or after Jan. 1, 2023, and before Jan. 1, 2033.

How do I qualify for these tax credits?

To qualify, the upgrade must be eligible property and meet the required efficiency standards, and it must be installed in a qualifying residence.

1.) Eligible improvements (common HVAC-relevant items)

The IRS lists eligible “residential energy property expenditures” that can qualify, including:

  • Central air conditioners (subject to a $600 cap per item)
  • Electric or natural gas heat pumps (not subject to the $600 cap; instead part of a separate $2,000 annual limit bucket)
  • Electric or natural gas heat pump water heaters (same $2,000 annual limit bucket)
  • Natural gas/propane/oil furnaces or hot water boilers (subject to $600 cap per item)
  • Certain electrical panel/circuit upgrades (“enabling property”) when installed in conjunction with qualifying improvements and enabling installation/use

2.) Energy-efficiency requirements

For HVAC equipment to qualify, the item must meet efficiency requirements, including:

  • Heat pumps, heat pump water heaters, central ACs, furnaces/boilers, and certain water heaters must meet or exceed the highest efficiency tier (not including advanced tier) established by the Consortium for Energy Efficiency (CEE) in effect when the property is placed in service.
  • For split system heat pumps, the entire matched system (indoor + outdoor components) must be installed and meet the requirements.

3.) Residence requirements (very important)


§25C has different residence rules depending on the type of improvement:

  • For windows/doors/insulation/air sealing: must be installed in a U.S. home owned and used as your principal residence (renters and second homes don’t qualify for these items).
  • For HVAC equipment (heat pumps, central AC, furnaces/boilers, etc.) and panel/circuit upgrades: must be installed in a U.S. home used as a residence by you (this can include a second home, and in some cases a rented home you use as a residence).
  • The credit is never available for homes not used as a residence by the taxpayer (e.g., landlords can’t claim it for a rental they don’t live in).
4.) Key limitations and other rules
  • Nonrefundable: it can reduce your tax liability, but you won’t get refunded for any unused amount beyond your tax liability.
  • No carryforward: if you can’t use it all that year, the unused portion is lost.
  • Existing homes only: generally for improvements to an existing home (or addition/renovation), not a newly constructed home.
  • Used property doesn’t qualify.
  • Labor costs: labor can be included only for certain “residential energy property expenditures” (like HVAC equipment). Labor is not includable for windows/doors/insulation/air sealing.
  • Manufacturer PIN/QM Code requirements (starting 2025 for many items): for specified property placed in service on/after Jan. 1, 2025, the IRS requires a qualified product identification number (PIN) on the tax return (in 2025, a QM Code may be used in lieu of a PIN for specified property; a full PIN is required starting 2026).

How much do I qualify for?

The credit is 30% of eligible costs, subject to annual caps:

Annual caps (most common)

  • Generally up to $1,200 per year total for many categories combined.
  • A separate annual limit of up to $2,000 applies (in aggregate) for:
  • - Electric or natural gas heat pumps
  • - Electric or natural gas heat pump water heaters
  • - Biomass stoves/boilers
Per-item caps that matter for HVAC/electrical
  • Central air conditioner: 30% of cost up to a $600 cap per item
  • Electrical panel/circuit upgrades that qualify as enabling property: $600 cap per item
  • Heat pumps/heat pump water heaters are not subject to the $600 cap, but do fall under the $2,000 annual bucket.

Maximum possible in one year

Because of the separate $1,200 + $2,000 buckets, the IRS notes a taxpayer could potentially claim up to $3,200 in a year if they have enough qualifying spend across both buckets.

Important note about tax liability

§25C is nonrefundable and cannot be carried forward, so your usable credit may be limited by your tax liability for that year.

What is the deadline?

  • Eligible property must be placed in service on/after Jan. 1, 2023 and before Jan. 1, 2033.
  • You claim the credit for the tax year you paid/incurred the qualifying expenses (and the item is placed in service).
  • If you missed claiming it, you can generally file an amended return to claim a refund within 3 years of filing the original return (or 2 years after paying the tax, whichever is later).

How do I claim this tax credit?

For §25C, the IRS says to claim the credit by filing:

  • IRS Form 5695 (Residential Energy Credits) with your federal income tax return for the year you’re claiming the credit.

If you’re considering a heat pump upgrade, high-efficiency AC replacement, or electrical improvements to support new HVAC equipment, ACE can help you choose eligible options and install them correctly.

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