By Chad Wiswall, Owner & Lead HVAC Technician, Alabama HVAC License #92244
Federal HVAC tax credits are one of the most underused incentives available to Alabama homeowners. Every spring we get calls from customers who just filed their taxes and asked their preparer "did you claim the credit for my new heat pump?" only to find out they could have but did not. Worse, we sometimes get calls from people who bought equipment that does not qualify, after their previous contractor told them it would. This guide is part of our complete guide to HVAC in Central Alabama.
This guide is the straight version of what is available in 2026 for Central Alabama homeowners, what equipment qualifies, what documentation Chad's AC Direct provides, and how to make sure you actually capture the credit at tax time. The information here reflects current IRS guidance under the Inflation Reduction Act (IRA) provisions for Section 25C and Section 25D as they stand in 2026.
Section 25C: Energy Efficient Home Improvement Credit
The Section 25C Energy Efficient Home Improvement Credit covers most conventional HVAC equipment upgrades. It is the one most Alabama homeowners qualify for when replacing a furnace, central AC, or air-source heat pump.
Credit amount: 30 percent of the qualifying equipment cost, including installation labor, subject to per-category annual caps. The total annual cap across all eligible improvements is $3,200.
Specific HVAC sub-caps within the $3,200 annual limit:
- Heat pumps and heat pump water heaters: up to $2,000 per year credit. (This is the largest single-category cap and applies to qualifying air-source heat pumps, including ducted and ductless mini-split heat pumps.)
- Central air conditioners: up to $600 per year credit.
- Natural gas, propane, or oil furnaces and boilers: up to $600 per year credit.
- Insulation, air sealing materials, energy audits, and other building envelope improvements: various sub-caps, collectively counted within the $3,200 annual maximum.
The credit is non-refundable, meaning it reduces your tax liability but does not generate a refund beyond what you owed for the year. Unlike Section 25D (below), Section 25C amounts that exceed your tax liability do not carry forward to future years.
The annual cap structure is important: the $3,200 is per tax year, not per project. If you are doing a multi-stage upgrade (heat pump in year 1, ductwork sealing and insulation in year 2), you can capture the credit in each year separately. This matters more in Alabama than many other states because we often see homeowners doing phased upgrades.
What Equipment Qualifies for Section 25C
Not all HVAC equipment qualifies. The IRS requirements as of 2026:
Heat pumps must meet the highest tier of the Consortium for Energy Efficiency (CEE) program in effect at the time of purchase. For air-source heat pumps in the southeastern U.S. region (which includes Alabama), this typically means:
- SEER2 of at least 15.2 (cooling)
- EER2 of at least 11.7 (cooling at high temp)
- HSPF2 of at least 8.1 (heating)
These thresholds change periodically as CEE updates its tiers. Always verify the current CEE qualifying tier list before purchase if the equipment is borderline.
Central air conditioners must meet CEE highest tier:
- SEER2 of at least 16.0 (split system)
- EER2 of at least 12.0
Natural gas, propane, or oil furnaces must meet:
- AFUE of at least 97 percent for natural gas/propane
- AFUE of at least 90 percent and meet specific design criteria for oil-burning furnaces
For ductless mini-split heat pumps (relevant to many Alabama retrofit and sunroom-addition installs):
- Must be ENERGY STAR certified
- Must meet the CEE heat pump tier for the southeastern region
Equipment that does NOT qualify includes:
- Older non-variable speed central AC units below the CEE threshold
- Standard 80 percent AFUE furnaces (these are common in older Alabama homes; they do not qualify)
- "DIY" mini-split kits (typically do not have the CEE tier rating documentation)
- Used or refurbished equipment (must be new)
- Equipment installed in a non-primary residence in some cases (verify with your tax preparer)
Section 25D: Residential Clean Energy Credit
Section 25D is the bigger credit, but it applies to a narrower category of equipment. For Alabama homeowners considering geothermal, solar, or fuel cell systems.
Credit amount: 30 percent of total installed cost, with NO dollar cap. This is the major difference from Section 25C.
Qualifying equipment:
- Geothermal heat pump systems (residential, primary or secondary residence)
- Solar electric (photovoltaic) systems
- Solar water heating systems (must heat water used inside the dwelling, not just a pool)
- Small wind energy systems
- Fuel cell property (relatively rare in residential applications)
- Battery storage technology with capacity of at least 3 kWh (added in 2023)
For HVAC purposes, the credit category most Alabama homeowners care about is geothermal heat pumps. On a typical $35,000 geothermal install, the federal credit is $10,500 with no cap, unlike the $2,000 cap on conventional heat pumps under Section 25C.
The credit is non-refundable but unused portions CAN carry forward to future tax years. This is important for higher-cost installs where the credit may exceed your annual tax liability.
The Section 25D credit remains at 30 percent through 2032, then phases down to 26 percent in 2033 and 22 percent in 2034 under current law.
How Section 25C and Section 25D Interact
You can claim both Sections 25C and 25D in the same tax year for different equipment, as long as the equipment categories are distinct. Examples:
- A Montgomery homeowner installs a qualifying $14,000 air-source heat pump (Section 25C, $2,000 credit) AND a $30,000 geothermal system at their Lake Martin lake house (Section 25D, $9,000 credit). Both credits apply.
- A Prattville homeowner installs a $12,000 high-efficiency heat pump (Section 25C, $2,000 credit) AND adds insulation/air sealing for $1,200 (Section 25C envelope credits, $360 credit, both within the $3,200 cap). Both credits apply within the $3,200 annual Section 25C limit.
You CANNOT double-dip the same equipment under both sections. A geothermal heat pump is Section 25D only, not also Section 25C.
Alabama Power Rebates: Stack on Top of Federal Credits
The federal credits stack with Alabama Power utility rebates. The two are not mutually exclusive.
Alabama Power's current residential rebate programs typically include:
- High-efficiency heat pump rebate: typically $150 to $400 per ton of installed capacity, depending on SEER/HSPF rating and the specific program in effect. (Verify current rebate amounts with Alabama Power, as programs adjust.)
- Geothermal heat pump rebate: typically $400 to $1,000 per ton, stacked on top of the Section 25D 30 percent federal credit.
- Ductless mini-split rebate (when qualifying high-efficiency equipment): variable amount based on tonnage and efficiency tier.
To capture the Alabama Power rebate, the equipment must meet the program's efficiency requirements (usually similar to the CEE tiers but verify program by program), the install must be done by a licensed Alabama HVAC contractor, and the application must be submitted typically within 90 days of installation.
Chad's AC Direct handles the Alabama Power rebate paperwork on installs in our service area. We submit the AHRI certification, contractor license verification, and equipment serial numbers required for the rebate.
ENERGY STAR Qualifying Equipment
For the Section 25C credit, equipment must typically be ENERGY STAR certified at the time of purchase. ENERGY STAR is a federal program (jointly EPA and DOE) that certifies high-efficiency equipment.
To verify a specific model qualifies:
- Look for the ENERGY STAR label on equipment documentation
- Check the ENERGY STAR product finder online for your specific model number
- Verify CEE tier in the AHRI certification (for heat pumps, this is the most important data point for the credit)
The Manufacturer Certification Statement is the document the IRS expects you to keep (you do not submit it with the return, but you must retain it for at least 3 years in case of audit). Chad's AC Direct provides this with every install along with the AHRI certificate, serial numbers, and installation date documentation.
What Documentation Chad's Provides
For every install where the customer plans to claim the federal tax credit, Chad's AC Direct provides at install completion:
- Manufacturer Certification Statement (the document confirming the equipment meets the federal tax credit requirements as of the install date)
- AHRI Certificate (Air-Conditioning Heating Refrigeration Institute certificate matching your specific equipment combination to the CEE tier)
- Equipment serial numbers and model numbers for the installed system
- Itemized invoice showing equipment cost, installation labor, and total project cost (the IRS allows the credit on the total including labor)
- Installation date (the credit is claimed in the tax year the equipment is "placed in service," meaning the install is complete and the system is operational)
- Our Alabama HVAC contractor license number (#92244) for the customer's records and for any audit documentation
Keep all of these documents for at least 3 years after filing the return that claimed the credit.
How to Claim the Credit on Your Tax Return
The credits are claimed on IRS Form 5695, Residential Energy Credits. The form has two parts:
- Part I is for Section 25D (Residential Clean Energy Credit) - geothermal, solar, etc.
- Part II is for Section 25C (Energy Efficient Home Improvement Credit) - conventional heat pumps, AC, furnaces, etc.
You enter the qualifying cost in the appropriate line, calculate the credit, and the credit then flows to your Form 1040 Schedule 3 line for nonrefundable credits.
If you use a tax preparer or tax software, give them the Manufacturer Certification Statement and itemized invoice; any competent preparer will know how to handle Form 5695. If you prepare your own taxes, the IRS instructions for Form 5695 walk through the calculation step by step.
Common claim errors we see:
- Forgetting to claim the credit (most common). If your preparer did not ask about HVAC upgrades, mention it.
- Claiming on equipment that does not qualify (second most common). Verify the CEE tier before purchase or get written confirmation from your installer that the specific equipment qualifies.
- Trying to claim labor on equipment categories that exclude labor (Section 25C historically allowed labor for heat pumps, central AC, furnaces; the rules have evolved with IRA updates, verify current year).
- Carrying forward Section 25C amounts (you cannot; only Section 25D carries forward).
Deadlines and Timing
The credit is claimed in the tax year the equipment is "placed in service." If your install completes in December 2026, the credit is claimed on your 2026 tax return (filed by April 2027).
If the install spans years (project starts in December 2026, finishes in January 2027), the placed-in-service date is when the system is operational and accepted by the customer, not when the project was started. Time your installs accordingly if you want the credit in a specific tax year.
Both Section 25C and Section 25D are scheduled in current law to remain at their stated credit amounts through 2032. Always verify current-year rules before filing, as tax law can change.
Frequently Asked Questions
Can I claim the federal HVAC tax credit if I rent my home? The federal residential energy credits (both 25C and 25D) are for the property owner. Renters cannot claim them, but the landlord might be eligible if the property is the landlord's primary residence (uncommon). For rental properties, different commercial energy incentives may apply; consult a tax preparer.
Do I get the credit as a check from the IRS? No. The credit reduces your federal income tax liability. If you owed $4,000 in federal income tax and qualify for a $2,000 credit, your liability drops to $2,000. If you already had $4,000 withheld from your paycheck, you would get a $2,000 refund. The credit itself is not a separate check.
What if my federal tax liability is less than the credit amount? For Section 25C (Energy Efficient Home Improvement), the unused credit is lost; it does not carry forward to future years. For Section 25D (Residential Clean Energy Credit), the unused credit CAN carry forward to future tax years. This is one reason Section 25D is the more attractive credit for higher-income retirement-stage homeowners with variable income.
Do I need to file Form 5695 even if my preparer files my taxes? Yes, but you do not file it yourself if you use a preparer. Give your preparer the Manufacturer Certification Statement and itemized invoice; they will file Form 5695 as part of your return.
What documentation do I need to keep, and for how long? Keep the Manufacturer Certification Statement, AHRI Certificate, itemized invoice, and serial numbers/model numbers for at least 3 years after filing the return that claimed the credit. The IRS has 3 years from filing to audit a return under normal circumstances; longer if certain conditions apply.
Does Alabama have a state tax credit on top of the federal credit? No, Alabama does not currently have a state-level personal income tax credit for residential HVAC upgrades. The only state-level incentives are utility rebates (Alabama Power, in most of Central Alabama).
Planning an HVAC upgrade in Central Alabama and want to make sure you capture the federal tax credit? Call Chad's AC Direct at (334) 264-6464 (Montgomery) or (334) 478-1438 (Dadeville) to schedule a free in-home estimate. We will spec equipment that qualifies for the credit, provide all the documentation you need at install completion, and submit your Alabama Power rebate paperwork. Alabama HVAC License #92244, BBB A+ Accredited since 1995, 1,247 5-star Google reviews from Central Alabama customers. Financing available through Wells Fargo, Goodleap, Microf, and Alabama Power. Note: Chad's AC Direct does not provide tax advice; consult your tax preparer to confirm your eligibility and how to claim the credit on your specific return.