Does Your New Furnace Qualify for an Energy Credit?

A new furnace can still earn you a federal furnace energy tax credit, but only if it was installed and running by December 31, 2025. The credit is worth 30 percent of your total project cost, capped at $600 per furnace, and you claim it on Form 5695 with the tax return for the year installation was completed.¹ The One, Big, Beautiful Bill, signed July 4, 2025, terminated the Section 25C Energy Efficient Home Improvement Credit for any property placed in service after that date.²

The 2025 Deadline and What Counts as Installed

The credit follows the “placed in service” date, meaning the date the installation was finished and the furnace became operational. A unit purchased in 2025 but not installed until 2026 does not qualify. There is no transition rule and no grace period.²

If your installer finished the job in December 2025, confirm your receipt shows that completion date. A November 2025 purchase with a January 2026 install date gets nothing. Furnaces installed during 2023, 2024, or 2025 all fall under the same credit rules described below, and unclaimed prior-year installations can still be handled through an amended return for the correct year.

Which Furnaces Meet the Efficiency Standard

Section 25C tied eligibility to the highest efficiency tier set by the Consortium for Energy Efficiency as of the start of the calendar year.³ In practical terms:

Natural gas and propane furnaces need an Annual Fuel Utilization Efficiency (AFUE) rating of at least 97 percent plus ENERGY STAR certification.⁴
Oil furnaces need ENERGY STAR certification and a manufacturer rating for use with fuel blends containing at least 20 percent biodiesel, renewable diesel, or second-generation biofuel.⁴
Standard electric resistance furnaces are not eligible under this credit at all. Electric heat pumps sit in a separate category with their own limits.

The oil furnace requirement catches people out. A high AFUE alone is not enough; the unit itself has to carry the biofuel blend rating. Check the manufacturer’s specifications before you file.

How the Credit Amount Is Calculated

The credit is 30 percent of your total qualified cost, including labor for installation.³ Three caps sit on top of that:

$600 is the maximum credit for a single furnace, regardless of project cost.
$1,200 is the combined annual cap for furnaces together with exterior doors, windows, skylights, insulation, and home energy audits. Stack too many of those in one year and the total credit stops at $1,200.
$3,200 is the overall annual ceiling, combining the $1,200 category limit with a separate $2,000 allowance for heat pumps, heat pump water heaters, and biomass stoves.¹

Because heat pumps sit in their own bucket, a homeowner who installed both a qualifying furnace and a qualifying heat pump in 2025 could claim up to $600 for the furnace and up to $2,000 for the heat pump in the same year.¹

Who Can Claim the Furnace Credit

The residence rule for furnaces is looser than for windows, doors, or insulation. The home has to be located in the United States and used as a residence by the taxpayer, but it does not have to be your principal residence and you do not have to own it.⁵

That opens the credit to two groups often assumed to be excluded:

Renters who paid for a qualifying furnace installation in a home they live in can claim it.
Owners of vacation or second homes qualify, as long as they use the property as a residence.

Two exclusions still apply. Landlords who never live in the property cannot claim the credit. And new construction does not count; the home must be an existing dwelling you improved.¹

Documentation You Need to Keep

Three pieces of paperwork support the claim.

The manufacturer certification statement confirms the model meets Section 25C efficiency requirements. You do not attach it to your return, but keep it filed in case the IRS asks.⁶

Starting with 2025 installations, the IRS requires a Product Identification Number (PIN). For furnaces placed in service during 2025, you can use either a full 17-character PIN or a shorter QM Code. If the PIN is not on the packaging or the unit’s label, contact the manufacturer, who is required to make it available on request.⁷

Your installation receipt should itemize the furnace cost separately from labor and include the purchase date, installation completion date, and the model and serial numbers. Matching those numbers to the certification and PIN ties the claim together.

How to File for the Credit

Claim the credit on IRS Form 5695, Residential Energy Credits. Part II handles the Energy Efficient Home Improvement Credit. Enter your qualified costs, calculate 30 percent, and apply the $600 furnace cap. The result flows to Schedule 3 of your Form 1040.⁸

The credit belongs on the return for the tax year installation was completed. A 2025 install goes on your 2025 return, which most taxpayers file in early to mid-2026.⁹

The Credit Is Non-Refundable and Cannot Be Carried Forward

Section 25C can reduce your federal income tax to zero, but it cannot create a refund. If your tax bill in the installation year is smaller than the credit you earned, the unused portion is lost. There is no carryforward to a future year.¹⁰

A $600 furnace credit rarely triggers this problem on its own. If you stacked improvements aiming for the full $1,200 or $3,200, check your 2025 tax liability before assuming you will capture the whole amount.

How Rebates Change the Calculation

Rebates and subsidies tied to the furnace purchase reduce your qualified expenses before you calculate the 30 percent.¹ A rebate must be subtracted when it is based on the cost of the property and comes from someone connected to the sale, such as the manufacturer, distributor, or installer. Public utility subsidies for energy-efficient equipment also reduce qualified expenses. For Department of Energy Home Energy Rebates Program payments, the IRS issued separate guidance in Announcement 2024-19.

Example: you pay $4,000 for a qualifying furnace installation and get a $500 manufacturer rebate. Qualified expense drops to $3,500. Thirty percent is $1,050, but the $600 per-furnace cap still applies, so your credit is $600 and the rebate had no effect on it. If the rebate were large enough to pull 30 percent of the remaining cost below $600, then you would feel the reduction.

1
Internal Revenue Service. Energy Efficient Home Improvement Credit
2
Internal Revenue Service. FAQs for Modification of Sections 25C, 25D, 25E, 30C, 30D, 45L, 45W, and 179D Under Public Law 119-21
3
Office of the Law Revision Counsel. 26 USC 25C – Energy Efficient Home Improvement Credit
4
ENERGY STAR. Furnaces (Natural Gas, Oil) Tax Credits
5
Internal Revenue Service. Frequently Asked Questions About Energy Efficient Home Improvements and Residential Clean Energy Property Credits – Qualifying Residence
6
Internal Revenue Service. Energy Efficient Home Improvement Credit – Qualified Manufacturer Requirements
7
Internal Revenue Service. Frequently Asked Questions – Energy Efficient Home Improvement Credit – PIN Requirements
8
Internal Revenue Service. About Form 5695, Residential Energy Credits
9
Internal Revenue Service. Home Energy Tax Credits
10
Internal Revenue Service. Frequently Asked Questions – Energy Efficient Home Improvement Credit – Timing of Credits