Should I Use the Energy Tax Credit for a New Central Air Unit?

by Darwin on April 15, 2010

Since I’m always looking to make sound investments with a favorable return on investment to optimize our family’s cash flow, I’ve been considering having a new Central Air unit installed.  There’s an energy tax credit (IRS Link) that expires at the end of this year that allows for a full 30% credit on the purchase and install of an energy efficient unit (max credit is $1500).  I’ve confirmed that there are no income limits on the credit, so essentially, if I spend $4000 on this project, I’ll get $1200 back next spring.  There are some key considerations that are driving this assessment:

  • Age of Existing Unit – Our house is about 15 years old.  As I’ve found with many other things in the house, the builders didn’t exactly use the top of the line suppliers for anything – from cabinetry to water heaters – to the Central Air unit.  Therefore, I don’t anticipate that this unit is going to last forever.  If it dies in 2 years, I’m going to have to replace it at full cost with no credit, and likely pay more to have it replaced as an emergency install if I don’t want to wait 3 weeks in 100 degree weather to pay for a routine scheduled install.
  • Efficiency of Existing Unit – I’ve gotta run the numbers once I get some quotes on new units, but in essence, the units being manufactured today are vastly more efficient than the generic model we have now.  The industry standard for efficiency is the SEER number.  The basic premise is for a higher SEER number, you’re going to pay more up front but realize lower operational costs long the way.  Conversely, if you pay less up front, you won’t save as much on energy costs.  My preliminary research is pointing toward a 16 SEER unit and I may replace the furnace blower as well – same reasons – age and efficiency.
  • Net Present Value – Using NPV (see NPV model at work) to drive financial decisions is a personal favorite of mine.  Once I have some models priced out and I can make some reasonable estimates on what my annual savings will be with say, 2-3 models, I can price out whether it’s worth the purchase and what my NPV will be over various time periods.  For instance, if we are staying in the house 10 years or longer, there’s no doubt in my mind the NPV will be favorable, especially considering the assumption that I’ll likely have to buy a new unit in a few years either way.  However, if we move in 3 years for whatever reason and we don’t anticipate a buyer paying a premium for a “new unit” per se, we may not break even.  So, that’s another key consideration.
  • Which Company to Use – We have a trusted electrician/plumber (jack of all trades) we’ve used before that recommended a local company.  He said he’s often done work along side them or after them on installs and people are always very happy with them.  I’ve done the contractor haggling thing before, but sometimes when I’ve put price over recommendations, we weren’t totally happy with the results like our patio.  Therefore, may just go with the recommended company and not try the haggling thing this time around.  This company typically deals with Carrier units, which rank well in the reviews I’ve read.

While spending several thousand dollars this year is never appealing, part of being a homeowner, and a financial steward at that, is to make investments that will end up costing you less in the future.  I think upon confirming our plans for staying put for a few years (we sometimes debate whether we want something a little different, but with this economy and housing market, it’s probably not the best time to move), the pricing will probably make sense.  I’ll be sure to come back with a detailed analysis on the annual savings and the 5-yr, 10-yr NPV for the project.

Are You Taking Advantage of The Energy Tax Credit This Year?

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1 Budgeting in the Fun Stuff April 15, 2010 at 3:38 pm

I’d go for it if the A/C is already 15 years old.

Our house was built in 2004, so I’m going to try to squeeze some more time out of our Seer 13 or 14 (I can’t remember and I’m not at home to look).

2 jim April 16, 2010 at 3:11 pm

We got the tax credit for having our house air sealed and increased insulation installed. The tax credit paid 30% and our utility chipped in about 33%.

3 Adam Snyder April 18, 2010 at 12:25 am

I would upgrade your unit. It will pay off itself soon, I had to fix our unit 3 times in the last 5 years and I finally just went for the update due to the tax credit.

4 Jackie May 5, 2010 at 7:30 pm

In addition to the tax credit, many utilities offer insentives and rebates on new AC systems. There might be additional savings there.

Also, your $4000 seem low to me. I put in a new central AC last year for $8000, although I think I had some extra costs since mine was a new install rather than a replacement.

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