The Section 25C Energy-Efficient Home Improvement Credit gives you 30% back on qualifying upgrades — insulation, heat pumps, windows, doors, and more — up to $3,200 per year. Unlike older energy credits, this one resets annually, so you can plan improvements over several years and claim the credit each time.
Credit Amount and Annual Caps
The credit equals 30% of the cost of eligible improvements, but each category has its own annual cap:
25C Credit Limits by Category (2026)
| Improvement Category | Annual Cap |
|---|---|
| Insulation and air sealing | $1,200 combined |
| Exterior doors | $250 per door / $500 total |
| Exterior windows and skylights | $600 total |
| Home energy audit | $150 |
| Central air conditioners | $600 |
| Furnaces and boilers | $600 |
| Heat pumps (electric) | $2,000 |
| Heat pump water heaters | $2,000 |
| Biomass stoves/boilers | $2,000 |
| Annual maximum total | $3,200 |
Note: The $1,200 sub-cap and $2,000 sub-cap are separate. You can claim up to $1,200 for non-heat-pump items plus up to $2,000 for heat pumps in the same year.
What Each Category Covers
$1,200 Sub-Cap Items
Insulation and air sealing ($1,200 cap): Materials that reduce heat transfer — blown-in insulation, batt insulation, rigid foam, weatherstripping, spray foam around doors and windows, door sweeps. Installation labor does not qualify — only materials.
Exterior doors ($500 total): Must meet Energy Star requirements. Up to $250 per door. Replacing two qualifying doors gives you up to $500 in eligible costs.
Windows and skylights ($600): Must meet Energy Star requirements. Includes storm windows installed over existing windows.
Home energy audit ($150): Must be conducted by a certified auditor. The auditor inspects your home and provides a written report identifying efficiency improvements and their costs.
Central air conditioners ($600): Must meet specific Seasonal Energy Efficiency Ratio 2 (SEER2) standards. Equipment specs must be documented.
Furnaces and boilers ($600): Gas, propane, or oil furnaces must be at least 97% AFUE. Boilers must be at least 95% AFUE.
$2,000 Sub-Cap Items
Heat pumps: Electric heat pumps that meet efficiency standards set by the Consortium for Energy Efficiency (CEE). Includes mini-split and whole-house systems.
Heat pump water heaters: Highly efficient — typically 2–4x more efficient than standard electric water heaters. Must meet Energy Star requirements.
Biomass stoves and boilers: Must use qualifying biomass fuel and have a thermal efficiency rating of at least 75%.
Worked Example: Strategic Home Upgrades
Sarah owns a home built in 1985. She plans upgrades over two years:
Year 1 (2026):
- New heat pump: $8,000 installed
- Attic insulation: $3,500 materials only
| Expense | Eligible Cost | Credit Rate | Credit |
|---|---|---|---|
| Heat pump | $8,000 | 30% | $2,400 → capped at $2,000 |
| Insulation materials | $3,500 | 30% | $1,050 → capped at $1,200 |
| Year 1 total credit | $3,050 |
Year 2 (2027):
- Replace 3 windows: $4,200
- Home energy audit: $300
- New exterior door: $800
| Expense | Eligible Cost | Credit Rate | Credit |
|---|---|---|---|
| Windows | $4,200 | 30% | $1,260 → capped at $600 |
| Energy audit | $300 | 30% | $90 → capped at $150 |
| Exterior door | $800 | 30% | $240 → capped at $250 |
| Year 2 total credit | $990 |
By spreading upgrades across two years, Sarah claims $4,040 in total credits.
Efficiency Requirements
The IRS requires improvements to meet specific standards. Check the manufacturer’s documentation or Energy Star certification:
- Windows/doors: Energy Star Most Efficient or Energy Star certified
- Heat pumps: CEE highest tier or Energy Star Most Efficient
- Heat pump water heaters: Energy Star certified
- Insulation: Must meet IECC standards for your climate zone
- Furnaces: 97% AFUE minimum; boilers 95% AFUE
Always keep manufacturer certifications. If your equipment doesn’t meet the threshold, the credit does not apply — even if it’s marketed as “efficient.”
How to Claim the Credit
You claim the 25C credit on Form 5695 (Residential Energy Credits), Part II. The credit then flows to your Form 1040, Schedule 3.
Steps:
- Identify all qualifying improvements made during the year
- Separate improvements into the two sub-cap categories
- Calculate 30% of each qualifying expense
- Apply the relevant caps
- Enter totals on Form 5695, Part II
- Transfer the credit to Schedule 3, Line 5
The credit is non-refundable — it reduces your tax bill, but excess credit is not refunded and cannot be carried forward.
25C vs. Other Energy Credits
Don’t confuse the 25C credit with the Residential Clean Energy Credit (Section 25D), which covers solar panels, battery storage, geothermal heat pumps, wind turbines, and fuel cells. The 25D credit is also 30%, carries no annual cap, and is non-refundable (but excess can be carried forward). Many homeowners claim both credits in the same year for different improvements.
The Energy Efficient Home Improvement Credit can be stacked with the residential clean energy credit (solar tax credit), which covers solar panels, wind turbines, and geothermal heat pumps on the same property. For a full list of all tax benefits available to homeowners — including mortgage interest, property tax, and energy credits — see tax deductions for homeowners. These energy credits reduce your tax liability dollar-for-dollar; they are reported alongside itemized deductions on your return but are separate from Schedule A.
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