Tax incentive for homeowners with new, cleaner-burning wood heaters

machine processes firewood

A machine processes firewood. USDA Forest Service photo.

Summer’s hot and humid days will soon turn to the cold, damp days of winter. If you rely on wood heat, or you’re interested in trying it, now is a great time to install a high-efficiency wood or pellet heater. A new, environmentally friendly model will keep you warm while producing lower emissions — and it may be eligible for a valuable tax credit.

Legislation passed in 2020 established a new Wood and Pellet Heater Investment Tax Credit under Section 25(D) of the tax code. It can be used when you purchase and install a wood heating system that is at least 75% efficient based on the higher heating value (HHV) of the fuel. These models produce significantly less particulate emission than less-efficient models.

In 2020, the Environmental Protection Agency (EPA) enacted stricter regulations that lowered the particulate emissions limit for new wood heaters to 2.0 grams per hour, or 2.5 if tested with cordwood. The previous limit was 4.5 grams per hour. The EPA has a searchable, certified wood heaters database with information on various models, including firebox volume, BTU output, overall efficiency (HHV percentage) and whether they comply with EPA’s 2020 standards. 

Qualifying heaters need to be purchased and installed between Jan. 1, 2021, and Dec. 31, 2023. The new tax credit covers 26% of the purchase and installation costs in 2021 and 2022 before decreasing to 22% in 2023. For instance, a consumer purchasing a $3,500 pellet-burning appliance with a $1,000 installation cost would receive a tax credit of $1,170 ($3,500 + $1,000 x 0.26). The new tax credit replaces the previous $300 credit.

The only records you need to retain for tax purposes are the purchase receipts, including the product cost and installation, and the manufacturer certificate stating that the heater qualifies for the credit and is at least 75% HHV efficient. This residential energy property credit is nonrefundable, meaning that it can lower your tax liability to zero, but not below zero. However, a taxpayer may carry the Section 25(D) credit forward to further reduce tax liability in future tax years.

If you are filing via tax software, look for the homeownership and residential energy credit in the credits section. If you are filing paper forms, submit IRS form 5695 (Residential Energy Efficient Property Credit) with your tax return. Consult with your tax advisor to ensure you file for the tax credit correctly.

Beyond producing fewer emissions, these new, more-efficient wood energy systems provide other economic and ecologic benefits because they create a market for wood resources that would otherwise be wasted. Most wood pellets are manufactured with sawmill waste that is not turned into lumber or other value-added products. Firewood is made from low-value trees or from portions of trees that cannot be used for higher-value products. Resource managers can use the fuelwood market as an outlet for material produced from clean-up after storm events (wind and ice); from efforts to reduce wildfire risk; and from removal of trees that are safety hazards along trails, roads and power lines.

As we move into wood heater season, the USDA Forest Service reminds folks to not transport freshly cut firewood long distances to help prevent the spread of invasive insects that can devastate forests. Strive to buy firewood close to where you will be burning it. Two resources available for information on safely transporting firewood are Don’t Move Firewood.org and Firewood Scout.org.

barrel of wood pellets

A barrel of wood pellets. USDA Forest Service photo.