Is a New HVAC System Tax Deductible?
For most homeowners, a new HVAC system is not a tax deduction. Tax deductions and tax credits are different things — and the main federal tax credit for residential HVAC improvements, the Section 25C credit, expired December 31, 2025.
Here is a clear explanation of the difference between deductions and credits, what was available before the expiration, and what options exist now in Maryland.
Not a deduction — was a credit
Residential HVAC installations are not deductible for most homeowners. The federal program that applied was a tax credit (25C). Credits reduce your tax bill directly; deductions reduce the income you are taxed on.
The 25C credit expired
The federal Section 25C energy efficiency tax credit expired December 31, 2025 under the One Big Beautiful Bill Act. Equipment installed in 2026 does not qualify under current law.
Maryland rebates are available
EmPOWER Maryland utility rebates through BGE and Potomac Edison are currently available for qualifying HVAC installations. These are utility rebates, not tax credits — they reduce your upfront cost.
Tax deduction versus tax credit: why the distinction matters
When homeowners ask if a new HVAC system is 'tax deductible,' they often mean one of two different things — and the answer is different for each.
A tax deduction reduces the amount of income that is subject to tax. If you are in the 22% bracket and you claim a $10,000 deduction, your tax bill goes down by roughly $2,200. Home improvement costs — including a new HVAC system — are not deductible for most homeowners on a federal return. They are not a business expense (unless the home is used for a business that claims it) and they are not mortgage interest.
A tax credit reduces your tax bill directly, dollar-for-dollar. A $2,000 tax credit cuts $2,000 from what you owe. The program that applied to HVAC equipment — Section 25C — was a tax credit, not a deduction. It was also non-refundable, meaning it could reduce your tax liability to zero but could not generate a refund.
- Tax deduction: reduces taxable income. Home improvements generally are not deductible.
- Tax credit: reduces tax owed directly, dollar-for-dollar.
- Section 25C was a credit, not a deduction.
- Non-refundable credit: could not exceed your tax liability for the year.
- Most homeowners asking about 'tax deductibility' of HVAC are thinking about the credit.
The federal 25C credit: what it covered and when it expired
The Section 25C Energy Efficient Home Improvement Credit was expanded under the Inflation Reduction Act of 2022. It offered a credit of 30% of qualifying costs, subject to annual caps by equipment category: $600 for qualifying central air conditioners, $600 for qualifying furnaces, and up to $2,000 for qualifying heat pumps and heat pump water heaters. These were annual maximums, not lifetime caps — you could claim the applicable amount each year you installed qualifying equipment.
Qualifying equipment had to meet minimum efficiency thresholds: for heat pumps, ENERGY STAR certification and specific SEER2/HSPF2 ratings. The equipment had to be for the primary home of the taxpayer, and the credit applied to the cost of equipment and installation.
The credit applied to equipment installed from January 1, 2023 through December 31, 2025. Under the One Big Beautiful Bill Act (Public Law 119-21, signed July 4, 2025), the credit was not extended beyond 2025. Equipment installed on or after January 1, 2026 does not qualify for the 25C credit under current law. If Congress reinstates any federal credit, this page will be updated.
- 25C credit rate: 30% of qualifying cost, subject to annual caps per equipment type.
- Annual cap for heat pumps: up to $2,000.
- Annual cap for qualifying central AC or furnace: up to $600.
- Non-refundable: credit could not exceed your federal income tax liability for the year.
- Expiration: December 31, 2025, under One Big Beautiful Bill Act (PL 119-21).
- 2026 installs: not eligible under current law.
If you installed qualifying equipment in 2025
If you installed a qualifying heat pump, central air conditioner, or furnace in 2025 — and the equipment met the ENERGY STAR and efficiency thresholds in effect at the time — you may be eligible to claim the 25C credit on your 2025 federal income tax return.
To claim the credit, you would use IRS Form 5695 (Residential Energy Credits) attached to your Form 1040. Your installer should provide documentation of the equipment model, efficiency ratings, and installation date.
This is general information, not tax advice. A qualified tax professional can verify eligibility based on your specific equipment, installation date, and tax situation.
- 2025 installs: may be eligible for 25C credit on your 2025 federal return.
- Use IRS Form 5695 to claim the credit.
- Your installer should provide: equipment model, efficiency ratings, installation invoice.
- Consult a tax professional for advice specific to your situation.
- Credit is non-refundable — it reduces your tax liability but cannot generate a refund beyond zero.
What is available now: EmPOWER Maryland
For equipment installed in 2026, the primary financial incentive available to Frederick-area homeowners is the EmPOWER Maryland utility rebate through BGE or Potomac Edison. These are not tax credits — they are rebates that reduce the upfront cost of the equipment and installation, typically applied at the time of installation through a participating contractor.
Unlike a tax credit, you do not need to wait until tax filing to receive the benefit — the rebate reduces what you pay at the time of installation. And unlike a non-refundable credit, the value is not limited by your tax liability.
Heat pumps typically qualify for the highest rebate amounts under EmPOWER Maryland. Program amounts change annually. For current rebate amounts, contact your utility (BGE or Potomac Edison) or ask a participating installer to confirm the rebate for the specific model before signing a contract.
- EmPOWER Maryland: utility rebate program, currently available, administered by BGE and Potomac Edison.
- Applied at installation through participating contractors — no tax filing required.
- Heat pumps typically qualify for the highest rebate tier.
- Program amounts change annually — verify before signing a contract.
- Not a tax benefit — a direct cost reduction on the installation.
Questions homeowners ask next
Can I deduct a new HVAC system on my taxes?
For most homeowners, no. Residential HVAC replacement is not a deductible home improvement for federal tax purposes. The relevant federal program was a tax credit (Section 25C), not a deduction — and that credit expired December 31, 2025. Consult a tax professional for advice specific to your situation, especially if the home is used for any business purpose.
Does a new HVAC system increase my home value, which might affect taxes?
A new HVAC system can add to your home's cost basis, which can reduce capital gains on a future sale. Whether this has any effect on your taxes depends on your gain and whether it exceeds the applicable exclusion thresholds. This is a separate question from a deduction or credit — consult a tax professional for how this applies to your specific situation.
I heard HVAC is deductible if I work from home. Is that right?
If you are self-employed and use part of your home as a primary business location, there may be a limited deduction for a proportional share of home-related expenses. The rules for the home office deduction are specific, and the deductible portion of HVAC costs under that deduction would be based on the percentage of your home used for business. This does not apply to employees who work from home — the home office deduction was eliminated for employees under current law. Consult a tax professional.
Is there any way to reduce the cost of a new HVAC system in 2026?
Yes — the EmPOWER Maryland utility rebate through BGE or Potomac Edison is currently available for qualifying installations. Heat pumps typically qualify for the highest rebate amounts. These are upfront rebates, not tax benefits, so you see the saving at the time of installation rather than on your tax return. Contact your utility or a participating contractor for current program amounts.