If you are planning to install a heat pump at your home but are hesitant due to its cost, you may be able to use a federal tax credit to reduce some of that cost. The heat pump tax credit results from the Inflation Reduction Act (IRA) approved in August 2022. Eligible residents can get a maximum credit of $3,200 for heat pumps and other energy saving installations.
Heat pump tax credit: what is it?
In 2022, the IRS approved the energy-efficient home improvement credit, which was part of the Inflation Reduction Act. The credit allows homeowners to cover qualifying costs related to energy-efficient improvements from 2023 to 2032.
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 covers the cost toward equipment, installation and labor.
Previously, the heat pump tax credit was capped at a $500 lifetime limit, but the Inflation Reduction Act made the new limit annual. The heat pump tax credit is not a discount, which means homeowners will have to pay the full price of the heat pump up front, and then claim the credit.
Depending on the type of heat pump you install, the heat pump tax credit could help offset a notable portion of its cost. A low-end heat pump system, including parts and installation, could cost between $6,000 to $10,000, while a high-end system costs between $18,000 to $20,000.
What are the requirements?
Homeowners can apply for the credit in the tax year they install the heat pump. For instance, if you install the heat pump in 2023, you will be able to claim the heat pump tax credit when you file your 2023 taxes in 2024.
You need to install the heat pump in your primary residence to qualify for the heat pump tax credit. Also, the residence must be in the U.S., and it should be on an existing property, not on new construction.
The heat pump you are installing must meet the highest energy-efficiency requirements, including being electric or natural gas with a thermal efficiency rating of at least 75%.
Heat pumps can be ducted or non-ducted and need to meet different energy requirements depending on whether you live in the North or the South. For instance, only ducted heat pumps with an ENERGY STAR label qualify if you live in the South. If the pump is ductless, then along with an ENERGY STAR label, it needs to meet a few other specifications as well.
If you live in the North, only ducted heat pumps with an ENERGY STAR Cold Climate label and an EER2 > 10 qualify for the credit. In the case of ductless, along with being ENERGY STAR Cold Climate certified, the pump also needs to meet specific energy ratings.
In addition to the energy-efficient home improvement credit, homeowners can also use the residential clean energy credit. But this credit applies only to geothermal heat pumps.
