Updated August 22, 2024
If you're looking to make home energy upgrades like heat pumps, now is a great time. In August 2022, the Biden administration and Congress passed the Inflation Reduction Act, which contains tax credits, rebates, and other incentives for heat pumps, water heaters, and other home upgrades.
Many of these credits are now available, while others are coming online later in 2024 or early 2025.
We have put together a quick article that explains the various tax credits you can get for heat pumps.
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- A Guide to Heat Pump Tax Credits
- What Heat Pumps Are Eligible for Incentives?
- What Is the High-Efficiency Electric Home Rebate Act (HEEHRA)?
A Guide to Heat Pump Tax Credits
Starting in 2023, you could be eligible for an annual tax credit of $2,000 for qualifying heat pumps and heat pump water heaters under the new tax guidelines included in the Inflation Reduction Act.
Here's a quick guide on the new tax credit:
- HVAC heat pump tax credit: 30% of your project costs, up to $2,000 per year
- Heat pump water heater tax credit: 30% of your project costs, up to $2,000 per year
- If you installed a qualifying heat pump HVAC system or water heater in 2022 or earlier, you may be eligible for a tax credit of up to $300 under the previous tax credit system.
- Geothermal heat pumps: 30% of your project costs
What Heat Pumps Are Eligible for Incentives?
While the federal income tax credit for heat pump HVAC and water heater upgrades has increased starting in 2023, to be eligible for the credit, you must install a qualifying heat pump. As an easy rule, any ENERGY STAR ducted heat pump is eligible for the tax credit. You can find a list of ducted and mini-split heat pumps that meet requirements on the ENERGY STAR website.
The official standards for heat pumps (water heaters don't apply here) are determined by the Consortium for Energy Efficiency (CEE). Each year, the CEE announces its updated appliance efficiency rating, formally known as the CEE tiers, which determines which heat pump HVAC systems qualify for the new federal tax credits starting in 2023. The full list of systems is available at the CEE website. The CEE tier list ranks products based on how efficient they are. To qualify for a heat pump tax credit for a heat pump HVAC system, you need to purchase and install either a ducted heat pump that meets CEE's Tier 1 requirements for your state and region, or a ductless heat pump that meets CEE's Tier 2 requirements for your state and region.
What Is the High-Efficiency Electric Home Rebate Act (HEEHRA)?
The High-Efficiency Electric Home Rebate Act (HEEHRA) program is part of the Inflation Reduction Act. The home electrification rebates that are part of this program, such as for heat pump HVAC or heat pump water heaters, are based on your household income. Designed for low-to-moderate-income households, the HEEHRA program can get you larger rebates on top of the regular tax credit. These discounts are all upfront and cover costs at point-of-sale.
As of mid-2023, the program has not been fully rolled out by the federal government. Households can prepare for the rebate to be available in late 2023 or early 2024 by performing a home energy audit.
Eligibility will be tied to percentages of your local median income. Families who make less than 80% of the median income are eligible for 100% discounts up to $14,000. Moderate-income families who make between 80-150% of the local median income are eligible for 50% discounts up to $14,000.
The HEEHRA program offers rebates of up to $8,000 for an electric heat pump, $4,000 for an electric panel upgrade (if needed to support heat pump upgrades), and $2,500 for electric wiring upgrades (if needed to support heat pump upgrades) for low- to moderate-income households (as defined by your state). A heat pump water heater can receive a rebate of $1,750. To be eligible for the program, your heat pump upgrades must be an ENERGY STAR-certified appliance. There is also a contractor rebate of up to $500.
It is crucial to note that before making any appliance purchase if you are counting on using a rebate, you should check with your State Energy Office (SEO) to ensure that the HEEHRA program will offer rebates retroactively for 2023 home energy upgrades that qualify.
If you're looking to save money on heat pump upgrades, there are multiple ways to do so, even if you don't qualify for the HEEHRA program rebates. Aside from federal and state home electrification incentives, utility rebate options and manufacturer rebates are often available for heat pump appliances. Moreover, new federal laws offer financial incentives for insulation, air sealing, and weatherization upgrades, which can enhance the efficiency of your heat pump upgrade, improve your home's comfort, and prolong its lifespan. Because 51% of your home's energy usage goes to heating and cooling alone, according to the EIA, heat pumps are key to cutting energy waste. You can also help reduce your carbon footprint!
When applying for heat pump tax credits or rebates, be sure to consult a tax professional and ensure you have a tax liability to reduce. All tax credits are a dollar-for-dollar reduction of your income tax each year, including tax credits for rooftop solar and electric vehicle upgrades. You need to report your heat pump home energy upgrades at the end of the tax year and provide documentation to prove your purchase. Please seek the guidance of a tax or financial advisor if you have any questions.
