Tax Credit for a Furnace Replacement

Applicable Tax Credits

• The IRS permits you to claim tax credits for replacing your furnace with an improved model that is more energy efficient. There is a small credit available for water heaters that use gas, oil, propane and electricity as fuel, as long as it meets certain standards. You are eligible for a much larger tax credit if you wish to replace a current model with a geothermal water heater.
  
  

Furnace and Water Heater Qualifications

• At the time of publication, to qualify for the credit, your new water heater must meet certain specifications and the replacement must occur at your primary residence. Gas, oil and propane heaters must carry an energy factor of .82 or greater or a thermal efficiency rating of at least 90 percent. All Energy Star gas tankless water heaters qualify, while most that have a tank do not. Electric heat pumps must carry an energy factor of 2.0 or greater and will not qualify if it has a tank storage system. All geothermal water heaters qualify for the residential energy property credit and the replacement can occur at either your primary or secondary residence.
  
  

Actual Tax Credit and Limits

• For gas, oil, propane and electric heaters, you can claim a tax credit for up to $300. Your eligibility depends on the amount you spent for the actual water heater and installation costs. For example, if you spent $250, then you can only claim a credit for $250. However, if you spent $900, you can claim the entire $300. For geothermal heat pumps, the maximum credit available is up to 30 percent of the costs for the equipment and installation, with a maximum of $1500. This is a nonrefundable credit, which means that once the taxes you owe reduced to $0, it will not provide you with a refund. However, you can carry any remaining credit forward to use in the following year. For example, if you have a tax liability found on line 37 of Form 1040 of $500 and your only tax credit is for replacing your water heater with a geothermal heat pump that cost $3,000, then you can claim $500 this year, reducing what you owe the IRS to $0. Next year you can claim up to $1,000 or the remaining balance of the credit to reduce any tax liability you have to $0.
  
  

Claiming the Tax Credit

• To claim the tax credit, you must complete Form 5695 and mail it with your tax return. Many of these tax credits expire in the following two years. At the time of publication, the credit for replacing your current furnace with a gas, oil, propane or electric water heater is set to expire on December 31. This means that you will not be able to claim it for any equipment put into service after this date.