You’ve seen the ads for “huge savings” on central air conditioning systems touting a $1,500 federal tax credit. What these ads are referring to is the expansion of tax credits for heating and air conditioning equipment in The American Recovery and Reinvestment Act of 2009 (ARRA) signed into law on February 16 of this year. What these same ads do not state, however, is that not all systems qualify for the credit, nor do all taxpayers.

Only systems that meet certain efficiency ratings are eligible. Also, the credit itself is actually a credit for 30% of the cost of the installed system up to a maximum of $1,500. If the system costs less than $5,000, the credit will be less than the $1,500 maximum. Last but not least, the credit is “non-refundable”, which means that it is capped at the amount a taxpayer actually owes in taxes, reduced by other available credits. Lower income taxpayers who qualify for the Earned Income and other credits may see their energy credit limited.

Putting aside taxes, it seems dealers are inflating the cost of these systems to $5,000 or more in order to be able to claim that their products qualify for the maximum $1,500 credit. Overpaying for a product just to qualify for a tax credit which may itself be limited is not smart. Many dealers seem to be cynically using the tax laws to mislead buyers. Unless and until greater regulatory scrutiny is placed on these dealers, this is clearly an area where the buyer needs to be aware in order to avoid being ripped off.