If you’re considering installing a heat pump at your home but are concerned about the cost, a federal tax credit could help alleviate some of the expenses. This heat pump tax credit is part of the Inflation Reduction Act (IRA), which was passed in August 2022. Homeowners who qualify can receive a tax credit of up to $3,200 for heat pumps and other energy-saving installations.
What is the Heat Pump Tax Credit?
In 2022, the IRS introduced the energy-efficient home improvement credit under the Inflation Reduction Act. This credit allows homeowners to cover qualifying expenses for energy-efficient upgrades made between 2023 and 2032.
Homeowners can claim a maximum of 30% of the total project cost as a credit, up to $1,200 for general home improvements, and $2,000 for heat pumps and biomass stoves or boilers. This credit includes costs related to equipment, installation, and labor.
Previously, the heat pump tax credit had a lifetime cap of $500, but the new legislation has made this limit annual. It’s important to note that this tax credit is not a direct discount; homeowners must pay the full price of the heat pump upfront and then claim the credit.
Depending on the type of heat pump installed, the credit could significantly reduce the cost. A basic heat pump system, including parts and installation, typically ranges from $6,000 to $10,000, while a high-end system can cost between $18,000 and $20,000.
Requirements for the Credit
Homeowners can apply for this credit in the tax year when the heat pump is installed. For example, if you install a heat pump in 2023, you can claim the credit when filing your 2023 taxes in 2024.
To qualify, the heat pump must be installed in your primary residence, located in the U.S., and must be on an existing property, not new construction.
The heat pump must meet specific energy efficiency standards, such as being electric or natural gas with a thermal efficiency rating of at least 75%.
Whether the heat pump is ducted or non-ducted, it must meet different energy requirements based on your location. For those living in the South, only ducted heat pumps with an ENERGY STAR label qualify. For ductless systems in the South, additional specifications are required along with the ENERGY STAR label.
For residents in the North, only ducted heat pumps with an ENERGY STAR Cold Climate label and an EER2 rating above 10 qualify. Ductless systems in the North also need to meet specific energy criteria along with being ENERGY STAR Cold Climate certified.
In addition to the energy-efficient home improvement credit, homeowners can also take advantage of the residential clean energy credit, but this is specifically for geothermal heat pumps.