| Furnace Type | Qualifying Efficiency | Credit Amount | Notes |
| Gas furnace (natural gas or propane) | ENERGY STAR certified, 97% AFUE or higher | 30% of cost, up to $600 | Must be listed on ENERGY STAR website |
| Oil furnace | ENERGY STAR certified | 30% of cost, up to $600 | Oil furnace ENERGY STAR criteria differ from gas |
| Gas furnace, 90-96% AFUE | Does NOT qualify | $0 | Below the 97% AFUE threshold |
| 80% AFUE gas furnace | Does NOT qualify | $0 | Well below the threshold |
The 97% AFUE threshold is deliberately high. The U.S. Department of Energy classifies high-efficiency furnaces at “90% to 98.5% AFUE” (energy.gov), and the tax credit targets only the very top of that range — 97% and above. This means that most two-stage 96% condensing furnaces — the most common upgrade choice — do not qualify for the federal credit. Only modulating furnaces carrying the ENERGY STAR label, typically 97% to 98.5% AFUE, meet the threshold. The $600 tax credit on a $6,000 to $10,000 furnace installation is a 6% to 10% discount — not enough to justify buying a 97% modulating furnace instead of a 96% two-stage furnace if the modulating furnace is not the right choice for comfort or budget reasons.
How to Claim the 25C Furnace Tax Credit
The credit is claimed on IRS Form 5695 — Residential Energy Credits — filed with your federal tax return for the year the furnace was installed. The installer must provide a Manufacturer’s Certification Statement — a document from the furnace manufacturer that certifies the specific model qualifies for the credit. This is not the same as the warranty registration or the installation invoice. It is a separate document that states the furnace model number and its compliance with the ENERGY STAR program requirements. Keep this document with your tax records. The IRS may request it in an audit.
The credit is available for installations in your primary residence only — not rental properties, not second homes. New construction does not qualify — the credit applies only to replacement furnaces installed in existing homes. The installation must occur during the tax year for which the credit is claimed. A furnace installed on December 28, 2026 qualifies for the 2026 tax year. A furnace installed on January 3, 2027 qualifies for the 2027 tax year.
State and Local Incentives: Stacking on Top of the Federal Credit
Many states, municipalities, and utility companies offer additional rebates or incentives for high-efficiency furnace installations. These are separate from the federal tax credit and can be combined with it. A $6,000 97% modulating furnace installation could qualify for the $600 federal credit plus a $300 utility rebate, reducing the net cost to $5,100. Check the ENERGY STAR website and your local gas or electric utility’s website for current rebates. The Database of State Incentives for Renewables and Efficiency (DSIRE) tracks state-level incentives and is updated regularly.
A $600 tax credit is not a reason to buy a 97% furnace. A 97% modulating furnace costs $1,500 to $2,500 more than a 96% two-stage furnace. The $600 tax credit recovers roughly 25% to 40% of that premium. The remaining $900 to $1,900 must be justified by the modulating furnace’s comfort and quiet benefits. If those benefits are worth $900 to $1,900 to you, buy the modulating furnace. If they are not, the tax credit is not large enough to change the decision.
FAQ: Common Questions About Furnace Tax Credits
Does replacing an 80% furnace with a 97% furnace qualify for any additional credits beyond the $600?
Not at the federal level — the $600 cap is the maximum for a furnace. However, the 25C credit has an annual aggregate cap of $1,200 for all qualifying energy efficiency improvements combined (furnace $600, heat pump $2,000, insulation $1,200, windows $600, etc.). If you replace both the furnace and add insulation in the same year, the total credit is capped at $1,200 across all improvements — unless you also install a heat pump, which has a separate $2,000 cap. The interaction of the different caps is complex, and a tax professional should be consulted for multi-improvement projects.
Can I claim the tax credit for a furnace installed in a rental property?
No. The 25C credit is available only for improvements to your primary residence — the home where you live most of the year. Second homes and rental properties do not qualify. If you install a qualifying furnace in a rental property, the cost is a business expense that is depreciated over time, not a residential energy credit.
A Qualifying Furnace Gets You $600. Do Not Let the Credit Drive the Decision.
A new furnace qualifies for a federal tax credit of up to $600 if it meets the ENERGY STAR criteria — typically 97% AFUE or higher for a gas furnace. The credit is 30% of the installed cost, capped at $600, claimed on IRS Form 5695. A furnace below 97% AFUE does not qualify.
The $600 credit reduces the net cost of a qualifying furnace by $600. It should not be the deciding factor between a 96% two-stage furnace and a 97% modulating furnace — the modulating furnace costs $1,500 to $2,500 more, and the credit recovers only a fraction of that premium. Buy the furnace that fits your comfort needs and your budget. Treat the tax credit as a small rebate on a qualifying purchase, not as a reason to change the purchase.
