TL/DR –
The Inflation Reduction Act approved by the IRS in 2022 includes a heat pump tax credit that could offset some of the cost for homeowners installing such energy efficient systems. Eligible homeowners can claim a maximum credit of 30% of the total project cost, or up to $1,200 for home improvements and $2,000 for heat pumps and biomass stoves or boilers. The credit, which covers the cost of equipment, installation, and labor, applies only to heat pumps that meet the highest energy-efficiency requirements, and is dependent on the type of heat pump installed and its energy efficiency rating.
Maximize Savings on Heat Pump Installations with Federal Tax Credit
Installing a heat pump can be a costly affair. However, homeowners can capitalize on a federal tax credit to mitigate some of that expense. Thanks to the Inflation Reduction Act (IRA) of August 2022, eligible residents can claim up to $3,200 in credit for heat pumps and related energy-efficient installations.
Understanding the Heat Pump Tax Credit
In 2022, the IRS greenlit the energy-efficient home improvement credit as part of the IRA. This credit empowers homeowners to defray costs associated with energy-efficient improvements from 2023 to 2032.
Qualified homeowners can reference a maximum credit of 30% of the total project costs. This equates to $1,200 for home improvements and $2,000 for heat pumps and biomass stoves or boilers. The credit covers equipment expenses, installation, and labor.
Prior to the IRA, the heat pump tax credit had a lifetime limit of $500; however, this has been revised to an annual limit. Importantly, the credit is not a discount, implying homeowners need to pay the full heat pump cost upfront before claiming the credit.
The heat pump tax credit can significantly offset the cost. For instance, a low-end heat pump system can range from $6,000 to $10,000 whereas a high-end system costs between $18,000 to $20,000.
Requirements for the Heat Pump Tax Credit
Homeowners can file for the credit in the tax year corresponding to the heat pump installation. For instance, a heat pump installed in 2023 can be claimed when filing 2023 taxes in 2024.
The heat pump must be installed in your primary US-based residence on existing property to qualify for the credit. The heat pump should also meet the highest energy-efficiency standards, including having at least a 75% thermal efficiency rating.
Heat pumps can be ducted or non-ducted and must meet diverse energy requirements depending on your geographic location. For instance, only ducted heat pumps with an ENERGY STAR label qualify in the South. If the pump is ductless, it needs to meet other specifications alongside the ENERGY STAR label.
Similarly, in the North, only ducted heat pumps with an ENERGY STAR Cold Climate label and an EER2 > 10 are eligible. For ductless pumps, they must be ENERGY STAR Cold Climate certified and meet specific energy ratings.
Besides the energy-efficient home improvement credit, homeowners can also leverage the residential clean energy credit, applicable only to geothermal heat pumps.
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