Heat Pump Tax Credit 2024: What You Need To Know (2024)

For those who aren’t totally clear on what a heat pump does, here’s a quick primer.

“Think of a heat pump as a super-efficient, all-in-one HVAC system that provides heating and cooling to your home,” says DR Richardson, co-founder at Elephant Energy. In other words, it’s one system that can provide all your temperature control needs as opposed to having separate air conditioning and furnace units.

There are different types of heat pumps but air source heat pumps are the most common types due to their affordability and ease of installation. In the winter, an air source heat pump heats your home by pulling warm air from outside, heating it up further and drawing it inside to circulate through your home. In the summer, it does the opposite.

“Because heat pumps move existing energy—rather than burning stuff to generate it anew—they are three to five times more efficient than the average fossil-fueled HVAC system,” says Richardson.

If you’re interested in upgrading to a heat pump, there are several factors to take into consideration, such as energy efficiency goals, cost, property location and maintenance.

“The initial cost of a heat pump could be higher for a homeowner to purchase than an HVAC system upgrade,” says Courtney Klosterman, home insights expert at Hippo. “However, heat pumps are generally more energy efficient than HVAC systems because they don’t burn fossil fuels to create heat.”

With that in mind, Richardson says some of the prime reasons for installing a heat pump include:

• Reduced monthly gas and electric bills: A study cited by the U.S. Department of Energy estimates that homes using Energy Star electric heat pumps will spend an average of less than $600 on heating during the winter months, which is much less than the typical home.
• Reduction in your carbon footprint. Home energy use is responsible for roughly 20% of greenhouse gas emissions in the U.S., according to a study published in Proceedings of the National Academy of Sciences. Across the country, heat pumps have been proven to reduce emissions by up to 93% compared with gas furnaces over their lifetime, according to the Rocky Mountain Institute.
• Comfortable, quiet heating and cooling. Heat pumps typically run at about the same decibels as a traditional furnace, despite misconceptions that they are loud, and provide a more even heating and cooling solution, ensuring a comfortable home year-round.

Thanks to the IRA, if you made or are planning to make certain qualified energy-efficient improvements to your home after January 1, 2023, you may qualify for a tax credit from the IRS.

For heat pump and heat pump water heater projects, the tax credit amount is 30% of the total project cost (includes equipment and installation), up to a $2,000 maximum.

“So, if your project costs $1,000, you could claim 30% of that ($300),” says Richardson. “If your project is $10,000, you can claim a $2,000 tax credit.”

Tax credits are applied to the tax year you install the heat pump. For example, if your heat pump is deployed in 2023, you can redeem your credit when you submit your taxes in 2024 for the 2023 tax season.

This tax credit is a part of the Energy Efficient Home Improvement Credit. There is no lifetime dollar limit for this tax credit. You can claim the maximum annual credit each year that you make eligible improvements through the end of 2032. Other improvements that qualify include home energy audits and qualifying insulation projects.

To qualify for the heat pump tax credit, you must install the unit in your primary residence—meaning the home where you live the majority of the time. Additionally, the home must be in the United States and be an existing property you’re upgrading, not a new construction.

Also, importantly, to qualify for the IRA tax credit, the specific heat pump or heat pump hot water heater model must meet the highest energy-efficiency requirements. Qualifying heat pumps include those that are electric or natural gas with a thermal efficiency rating of at least 75%.

Heat pumps may be either ducted or non-ducted (mini-splits), but eligibility also depends on whether you live in the North or the South.

If you live in the South, ducted heat pumps that have the ENERGY STAR label qualify. However, if ductless, then it must be an ENERGY STAR-certified heat pump with the following specifications:

• SEER2 (Seasonal Energy Efficiency Ratio 2) > 16
• EER2 (Energy Efficiency Ratio) > 12
• HSPF2 (Heating Seasonal Performance Factor 2) > 9

If you live in the North, ducted heat pumps designated as “ENERGY STAR Cold Climate” with an EER2 > 10 qualify. If ductless, the heat pump must still be ENERGY STAR Cold Climate certified but with the following energy ratings:

• SEER2 > 16
• EER2 > 9
• HSPF2 > 9.5

All taxpayers are eligible to receive one IRA tax credit for a heat pump per year (the max equivalent value of $2,000) if they meet the above criteria.

While you’re looking into upgrading your home with a heat pump, it would also be a great time to explore other similar tax credits for which you might be able to qualify like energy property costs and certain energy-efficient home improvements says Klosterman.

For example, installing exterior doors that meet ENERGY STAR requirements can get you up to $500 in tax credits ($250 per door max). Doing the same thing with windows could net you a $600 tax credit.

For homeowners interested in energy savings, a home energy audit is another great way to pinpoint your home’s energy consumption.

“This is a great step to take if you want to cut down on long-term homeownership costs and identify energy-efficient solutions for your home,” says Klosterman. Plus, you can potentially qualify for a home energy-efficiency tax credit of $150.

However, Klosterman suggests homeowners keep in mind that having an audit completed by a Department of Energy-approved certified auditor is typically required for those who want to take advantage of tax credits. So make sure you check your auditor’s credentials before hiring them if you want to successfully get this tax credit.

In addition to the heat pump tax credit, you may soon also be eligible for $1,750 to $8,000 towards a heat pump purchase in the form of a state-administered IRA rebate. These are part of a $4.5 billion federally funded program that will be in place through September 2031.

However, these rebates are not yet available. Each state has been granted federal funds for rebates which they are responsible for administering. It’s anticipated that a few states will roll these out over the course of 2024, and the remaining states will take their rebates live in 2025.

“Unlike tax credits, the IRA rebates—often referred to as the High-Efficiency Electric Home Rebate Act, or HEEHRA for short—will be available at the point-of-sale so that homeowners benefit from the savings upfront, rather than having to wait until tax season,” explains Richardson.

These rebates will only be available to low and moderate-income households and eligibility will be determined by the Area Median Income (AMI) where you live. Still, this is a great opportunity since high initial cost is often a deterrent to people making energy-efficientt upgrades.

“When HEEHRA rebates become available, they should cover up to 100% of electrification costs for low-income households and 50% for moderate-income households,” says Richardson.

That’s because once the state-administered rebates become available, income-qualified families will be able to take advantage of both the rebates and the tax credits to offset the cost of home electrification projects.

“Depending on where you live there may be additional rebates and incentives available to you,” says Richardson. “Most often these are state or city rebates but some utilities also offer rebates for upgrading to a heat pump.”

For example, Richardson says the average homeowner in Denver who installs a heat pump qualifies for an additional $8,000 in incentives—$4,500 in rebates from the city, $2,200 in rebates from the local utility and a $1,300 state tax credit.

Also, the average homeowner in greater Boston who installs a heat pump qualifies for up to $10,000 in additional rebates (this assumes the heat pump being installed will be the sole source of heating and cooling source for the home).

While there is no single database that captures every incentive available to homeowners across the country, the Database of State Incentives for Renewables & Efficiency is a good starting point for national and state-level rebates.

“What’s really important to remember, here, however, is that all of the above rebates may be stacked with the IRA tax credit to provide further savings for homeowners,” says Richardson.

There is no need to apply for IRA tax credits in advance. Instead, homeowners apply retroactively when they file their annual taxes. Homeowners should need to submit Form 5695, Residential Energy Credits along with their taxes for the tax year when they installed the system.

For the IRA rebates, which will be deployed at the state level, each state will design its own process and eligibility criterion (within the broader guidelines set by the IRA). These standards will be set on a per-state basis before the rebates launch in that state.

Since some of this is still being figured out, it’s wise to seek help. You don’t want to miss out on securing amazing incentives because of a loophole like not picking the right qualifying heat pump for your area.

“Because electrification incentives vary widely from state to state, it’s important to work with an electrification partner that is not only well-versed in how to install these electric technologies but also understands the local incentive landscape to ensure you are taking advantage of all the rebates and incentives available to you,” says Richardson.