You might have heard that you can get federal tax credits for energy efficiency and renewable energy works. If so, you’d be right! They can be a little confusing, and there are actually many of them out there.
The good news is that one of the best ones out there is the federal heat pump tax credit. And you can get up to $2,000 per year for heat pump installations, but sometimes it’s not so straighforward.
In this article I wanted to quickly go over what the tax credit is, how you can qualify for it, when you get it, and a few other practical tips. Without further delay, let’s jump into it!
What Is The Federal Heat Pump Tax Credit?
Started as part of the Inflation Reduction Act of 2022 (IRA) and also known as the 25C tax credit, you can get up $2,000 per year for qualifying heat pumps through the year 2032 as the law is currently written.
This was part of many other similar tax credits for solar, energy audits, air sealing, insulation, EV chargers, and further home electrification infrastructure with the national goal of moving away from fossil fuels.
More specifically, you can take 30% of the total heat pump project cost as a tax credit, with a cap of $2,000 yearly.
So if we do some quick math, if the project cost is a total of at least $6,667 for heat pumps, you’ll get the maximum $2,000.
Since the cost for even smaller mini split 1 or 2 zone systems cost at least that much for a professional install, it’s highly likely you’ll be able to maximize this tax credit.
One other important thing to note is that this tax credit is for existing primary residences only. You must live there almost year round, and it cannot be a new home.
What Systems Qualifiy For The Tax Credit?
The current specifics of qualified equipment are fairly simple. Per the law, the country is broken up into two zones: North and South. Practically, this split more or less determines the heating load (for winter) that is needed to heat your home efficiently.
Here are the current equipment requirements:
Ducted Heat Pump Requirements
South: All heat pumps that have earned the ENERGY STAR label
North: Heat pumps designated as ENERGY STAR Cold Climate that have an EER2 > 10
EER2 means Energy Efficiency Ratio 2, which per the Energy Star website technically means:
EER2 is the ratio of the average rate of space cooling delivered to the average rate of electrical energy consumed by the air conditioner or heat pump. This ratio is expressed in Btu per Wh (Btu/Wh).
– Energy Star
Ductless Mini Split Heat Pump Requirements
Mini splits are a little different. The components and heat pump technology is the same, but they don’t use existing ductwork in your home, hence the term “ductless”.
This changes the technical specifications a bit, so they have broken out these requirements by region:
South: ENERGY STAR certified heat pumps with
- SEER2 > 16
- EER2 > 12
- HSPF2 > 9
North: ENERGY STAR Cold Climate heat pumps with
- SEER2 > 16
- EER2 > 9
- HSPF2 > 9.5
In the northern regions, or places with much more heating demand due to winter climates, there is a big emphasis on what are called cold climate heat pumps.
These cold climate heat pumps are better technology, and basically can heat your home efficiently even if the temperature drops to 0 degrees or below.
This also goes into how critical correct design, sizing, and choosing the best cold climate heat pump unit is for your home.
It’s critical that you verify your equipment being installed so that you can actually qualify for these tax credits at half time. I go into that a bit more here –
Make Sure You Double Check The Model Number Of Your New Equipment Being Installed
Putting in the write equipment can be super confusing, and you’ll really have to verify with your HVAC / heat pump installer on the exact model number to verify that you’ll qualify.
This also eliminates their ability to play games with you. Since the tax credit is something you get at tax time and not up front, companies are not on the hook for guaranteeing this discount.
This means that they can sometimes promise or say whatever they want with the equipment to sell you on something cheaper, only for you later to find out it never qualified for the $2,000.
How Do I Get The Heat Pump Tax Credit?
You’ll receive the tax credit as part of your tax preparation. It’s important to note that this is not an up-front rebate or discount.
So whether you do your taxes in April or extend to the fall of the following year for example, that’s when you’ll see this benefit.
At tax time, you’ll use the IRS Form 5695 to fill out all appropriate information. I would recommend you review or print it out now, including the Form 5695 Instructions so that you know exactly what you need to do.
We are not CPA’s or tax advisors, so our disclaimer is that you must check with your own. But it’s understood that this is a tax credit against any reportable yearly income. In other words, if you don’t have $2,000 of taxes that you owe for that year, you will not immediately get this heat pump tax credit.
To our best knowledge at this time, your tax credit will then carryforward to future years when you have more taxes owed to the federal government.
Low Income or Income Qualified Possibilities
The laws are not totally clear yet on this, but we may get more news towards the end of 2024 or later.
It’s possible that additional heat pump rebates might be available up to $8,000 for low or qualified income tax payers and homeowners, so stay tuned for that. These bigger laws, in addition to working with all 50 states, sometimes take awhile to iron themselves out.
A Quick Note About Heat Pump Water Heaters
I just wanted to make a note that to the best our knowledge, the law basically bundles heat pump water heaters and heat pump HVAC systems into the same rebate.
This is important to know because if you’re upgrading both your water heater and HVAC system in the same year, you will max out the heat pump tax credit at $2,000. You will not get $2,000 for each one or $4,000 combined.
This is because the incentives are capped. Oftentimes after talking through goals with our customers, it makes sense for them to do the heat pump HVAC system first, then the water heater the next year, or vice versa depending on things like age of equipment, emergency failures, financial goals, and more.
You can read about the heat pump water heater incentives here as well, but you’ll see it’s much of the same information and rules as the heat pump HVAC systems.
How Does This Tax Credit Work In Colorado?
Since the IRA heat pump tax credit is a federal incentive, it’s separate from other incentives such as the Xcel Energy tax credit, Colorado state tax credit, and potentially others.
This means they can stack on each other, given you a pretty great discount across the board when all added up.
The entire rebate process can indeed be daunting and confusing, be we pride ourselves in doing our best to maximize not only your home comfort and heat pump design needs, but to make sure we can get the most incentives and rebates possible.
Wrapping It Up
There’s a bit more, but I hope I’ve covered the major questions for you about these heat pump tax credits.
We design and install heat pumps throughout Colorado, so if you live here and have additional questions, or if you’re looking into a heat pump for yourself, feel free to reach out! We’d love to hear from you.
Thanks so much!
