The federal 25C Energy Efficient Home Improvement Tax Credit gives San Diego homeowners up to $2,000 per year for qualifying heat pumps and up to $600 for qualifying high-efficiency AC and furnace installs. It stacks with SDG&E TECH Clean California rebates, which means most heat pump installs in 2026 capture $3,000-$8,000 in combined incentives.
Here’s how the credit actually works, what qualifies, and how to make sure you claim it correctly.
The fast answer
| Equipment | Max federal credit | Efficiency requirement |
|---|---|---|
| Heat pump (ducted split) | $2,000 | 16+ SEER2, 9+ HSPF2 |
| Heat pump (mini-split) | $2,000 | 16+ SEER2, 9+ HSPF2 |
| Central AC (split) | $600 | 16+ SEER2 |
| Gas furnace | $600 | 97+ AFUE |
| Heat pump water heater | $2,000 | UEF 2.2+ |
| Insulation improvements | $1,200 | Various |
Annual cap: $1,200 for general energy improvements + $2,000 separately for heat pumps/water heaters/biomass stoves = $3,200 total annual maximum.
Important: the credit is non-refundable. It reduces your federal tax liability dollar-for-dollar, but doesn’t create a refund if you don’t owe federal taxes that year.
How the 25C credit actually works
The 25C credit was reformed and expanded under the Inflation Reduction Act of 2022. Current structure:
- 30% of qualified expenses for most improvements, capped by category
- Annual cap rather than lifetime cap (you can claim again in future years)
- Applied via IRS Form 5695 with your federal tax return
- Available through at least 2032
For HVAC specifically:
- Heat pumps: 30% of installed cost, capped at $2,000
- AC and furnaces: 30% of installed cost, capped at $600
- Equipment must meet specified efficiency standards (see below)
A $14,000 heat pump install with $4,200 of qualifying costs = $1,260 federal tax credit. A $9,000 heat pump install with $2,700 qualifying costs = $810 (under cap, so $810 actual).
What “qualified” means
Three requirements:
1. Equipment efficiency standard met. The system must meet the SEER2/HSPF2/AFUE thresholds above. Lower-efficiency equipment doesn’t qualify.
2. Energy Star Most Efficient certification OR similar. The IRS uses Energy Star’s “Most Efficient” tier as the reference for what qualifies. Check at energystar.gov before purchase.
3. Equipment installed in the year you’re claiming. The improvement must be placed in service during the tax year. Equipment purchased in December 2025 but installed in January 2026 counts for 2026 taxes.
What’s included in “qualified expenses”
The credit applies to the installed cost including:
- The equipment itself
- Labor for installation
- Refrigerant line set
- Electrical work for the installation
- Removal of old equipment
It does NOT typically apply to:
- Replacement of ductwork (separate insulation credit may apply)
- Thermostats (covered separately if part of the system)
- Diagnostic/repair work on existing systems
- Maintenance plans or warranties
Get itemized quotes that separate equipment + installation costs from other line items so you can document the qualified expense amount cleanly.
How it stacks with SDG&E rebates
The federal 25C credit is independent of state and utility rebates. Most San Diego heat pump installs in 2026 capture both:
| Incentive | Heat pump value |
|---|---|
| Federal 25C tax credit | Up to $2,000 |
| SDG&E TECH Clean California rebate (standard) | $1,000-$3,000 |
| SDG&E TECH Clean California rebate (under 80% AMI) | $2,000-$4,500 |
| SDG&E TECH Clean California rebate (under 60% AMI) | $4,000-$6,000 |
| SDG&E Equipment Rebate (additional) | $200-$500 |
Combined for standard income: $3,200-$5,500 off a typical install Combined for moderate income: $4,200-$7,000 off Combined for low income: $6,200-$8,500 off
These stack because they come from different programs (federal vs state utility) with different eligibility rules.
For the full SDG&E rebate breakdown, see our 2026 heat pump rebate guide and the SDG&E eligibility breakdown.
How to claim the credit
Three steps:
1. Keep documentation. Itemized invoice from your contractor showing equipment model numbers, installed cost breakdown, and install date. Manufacturer specification sheet showing the equipment meets the efficiency standard. Permit documentation from the install.
2. File IRS Form 5695 with your federal tax return for the year the equipment was installed. The form walks through the calculation: qualified expenses × 30%, then apply category caps.
3. Reduce your federal tax liability by the credit amount. If you owe $5,000 in federal taxes and have a $2,000 credit, you owe $3,000 instead. If you owe less than the credit, the credit doesn’t roll over (one-year-only credit).
Most tax software (TurboTax, H&R Block, FreeTaxUSA) handles Form 5695 within the standard interface. If you use a CPA, mention the credit specifically, they’ll file it correctly.
Common 25C mistakes
Four patterns that cost homeowners credit money:
1. Buying equipment that doesn’t quite meet efficiency requirements. A 14.3 SEER2 system is California code minimum but doesn’t qualify for the 25C credit (requires 16+). Worth paying the small upgrade premium to qualify.
2. Not separating equipment from non-qualifying expenses on the invoice. If the contractor lumps “$14,000 total” without itemization, the IRS expects you to document specifically what was equipment + install. Get itemized invoices.
3. Not registering the manufacturer warranty. Doesn’t affect 25C directly, but most homeowners doing one paperwork task miss the other. Both deserve attention at install time.
4. Forgetting to claim the credit in the install year. The credit is one-year-only, you can’t go back and claim it for prior years. If you installed in 2025 and forgot to file Form 5695, that credit is gone.
What about heat pump water heaters
The $2,000 cap is per category, so you can stack:
- Heat pump (HVAC): up to $2,000
- Heat pump water heater: up to $2,000
If you install both in the same year, you can potentially claim up to $4,000 in federal credit (subject to actual qualified expenses meeting the caps). For households doing a comprehensive electrification project, the math gets attractive.
What’s changing for 2027 and beyond
The 25C credit was authorized through 2032 by the Inflation Reduction Act. Current administration policy could affect future years, but as of mid-2026 the credit is intact through 2026 at minimum.
Recommendation: if you’re planning HVAC upgrades, doing them in 2026 captures certainty. Waiting for future years means betting on continued policy stability that may or may not happen.
FAQs
How much is the federal HVAC tax credit?
30% of qualified equipment + installation cost. Capped at $2,000 for heat pumps and $600 for AC or furnaces per year. Total annual cap of $3,200 across all qualifying improvements.
What HVAC systems qualify for the 25C tax credit?
Heat pumps with 16+ SEER2 and 9+ HSPF2. Central AC with 16+ SEER2. Gas furnaces with 97+ AFUE. All must meet Energy Star Most Efficient tier or equivalent.
Can I claim both the federal tax credit and SDG&E rebates?
Yes. The federal 25C credit is independent of state and utility rebates. Most San Diego homeowners installing heat pumps in 2026 capture $3,000-$8,500 in combined incentives.
How do I claim the 25C tax credit?
File IRS Form 5695 with your federal tax return for the year the equipment was installed. Keep itemized invoices and manufacturer specifications as documentation.
Is the 25C credit refundable?
No. The credit reduces tax liability but doesn’t create a refund. If your federal tax owed is less than the credit, you don’t get the unused portion back.
What if I don’t owe federal taxes?
The credit doesn’t apply. Lower-income households who don’t owe federal income tax may not be able to use the 25C credit, but should focus on SDG&E TECH Clean California rebates, which can be much larger ($4,000-$6,000) and don’t depend on tax liability.
Does my contractor handle the 25C paperwork?
Most don’t. The contractor provides the equipment specs and itemized invoice; you file Form 5695 yourself or through your tax preparer. SDG&E rebate paperwork is sometimes contractor-handled; federal tax credit is owner-handled.
How long is the 25C credit available?
Authorized through 2032 under current law. Could change with future federal policy. As of 2026, the credit is intact for the current and upcoming tax years.
When to call us
If you want to make sure your install qualifies for both federal 25C and SDG&E rebates, we’ll select equipment that meets both thresholds and document the install accordingly. Call (442) 777-6440 for a free in-home assessment.