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Heat Pump Tax Credits: Get Rewarded for Sustainable Heating and Cooling

A senior couple taking a closer look at their budget in the comfort of their home.

We all want to do our part for the environment and reduce our carbon footprint, but it can often be expensive. Especially when it comes to making energy-efficient home improvements like installing a heat pump. The good news is that there are several tax credits out there specifically designed to help you with the cost of such energy efficiency upgrades. From federal credits to state and local incentives, you can find different ways to get rewarded for making your home more energy-efficient.

First Up: What Is A Heat Pump?

A heat pump is a device that transfers heat energy from one location to another, usually from a lower temperature source to a higher temperature space. It works by using a refrigeration cycle, similar to how air conditioners and refrigerators operate, but with the main goal of providing heating or cooling for a space.

There are different types of heat pumps, including:

  • Air-source heat pumps: These heat pumps extract heat from the outdoor air and transfer it inside for heating purposes. In the cooling mode, they work in reverse, removing heat from the indoor air and transferring it outside.
  • Ground-source or geothermal heat pumps: These heat pumps use the stable temperature of the ground or water sources to extract heat for heating purposes or to dissipate heat for cooling purposes.

Additional reading: How Much Does it Cost to Install a Heat Pump?

Will I Save Money With A Heat Pump?

Yes! Installing a heat pump can drastically reduce your energy bills. Heat pumps are incredibly efficient, especially in mild weather places like Portland, and can be up to 300% more efficient than traditional heating systems. This means that they use much less energy to provide the same amount of heating or cooling, resulting in lower utility bills for you. Additionally, there is no need for an additional fuel source, like you would need with a furnace or boiler.

Are Heat Pumps Considered Environmentally Friendly?

Heat pumps are considered environmentally friendly because they consume less electricity compared to conventional heating and cooling systems. They usually cost less to use in the winter and, despite their name, can reverse the refrigerant’s direction during the summer to cool. This means they can replace your AC and furnace for one HVAC unit that can be used year round.

If you are thinking about installing a heat pump, a home energy audit should be at the top of your to-do list. Not only will it identify the areas where your home is losing energy and money, but it will also give you a clear picture of where your home’s energy efficiency stands. Armed with this knowledge, you can make informed decisions when it comes to choosing the right heat pump for your home. Plus, an energy audit can help you identify other cost-saving measures you can take to reduce your energy bills and carbon footprint.  

What is the Inflation Reduction Act?

The Inflation Reduction Act (IRA) has introduced an array of fresh incentives to aid homeowners in making energy-saving enhancements to their homes up to 2032. These energy-efficient upgrades not only significantly reduce utility bills but also improve the health and comfort of individuals. For instance, investments in innovations like energy-efficient electric heat pumps can go a long way in conserving energy.

How Much Is The Tax Credit For A Qualifying Heat Pump?

Under the Inflation Reduction Act, the 25C tax credit for a qualifying heat pump is 30% of costs, including labor. There is a yearly credit limit of $2,000. This credit can help make the investment in a new heat pump more affordable and sustainable in the long run.

What is the HEEHRA?

The IRA subsidizes heat pumps with both tax deductions and rebates – making it an attractive option for homeowners. More specifically, the High-Efficiency Electric Home Rebate Act (HEEHRA) is the official program name and enables point-of-sale rebates of up to $8,000 – available on all home heating and cooling heat pumps. 

What’s more, the rebate amount is, at the point of purchase, automatically deducted –  no refunds necessary. Low- and moderate-income households can apply for HEEHRA rebates while higher-income households can apply for the 30% tax credit. The amount of each rebate or tax credit is determined by your household income and the chosen qualifying heat pump.You can use this calculator to see how the IRA can work for you. 

Does The Heat Pump Tax Credit Apply To Installation Costs? 

Yes! The Energy Efficient Home Improvement Credit allows for labor to be claimed on your taxes for a credit. 

Which Heat Pumps Qualify For The IRA Tax Credit?

Starting January 1, 2023, the U.S. Department of Energy identified heat pump product models that meet the criteria for the CEE specified within the Inflation Reduction Act. Currently, AHRI is working on incorporating CEE’s latest performance tiers into the heat pump categories and identifying systems eligible for federal tax credits including both ducted and ductless systems. Meanwhile, you can work with a certified HVAC professional to confirm the eligibility of a heat pump system for your home.

What Is A SEER Rating? 

SEER rating stands for Seasonal Energy Efficiency Ratio and measures the energy efficiency of cooling systems. Basically, the higher the seer rating, the more proficiently your AC or heat pump unit can cool your home. This is important not only for keeping your home comfortable, but it also can have a significant impact on your energy bills. In fact, the Inflation Reduction Act mandated higher minimum SEER ratings for qualifying AC and heat pump units in order to decrease energy consumption and costs. 

What Other Equipment Qualifies? 

The Inflation Reduction Act’s High-Efficiency Electric Home Rebate Act (HEEHRA) offers electrification rebates, such as a heat pump HVAC or heat pump water heaters, for those who qualify based on their household income.

By participating in the HEEHRA program, homeowners can upgrade their home’s energy efficiency, including the following improvements:

  • Low-income households, earning no more than 80% of the area’s median income, can have up to 100% of their project costs covered.
  • Moderate-income households can claim up to 50% of project costs if they earn between 80% and 150% of the Area’s Median Income.

Who Can Use The Heat Pump Tax Credits?

The Inflation Reduction Act provides heat pump credits to homeowners who purchase and install a new heat pump in their existing home between January 1, 2023 and December 31, 2032. Heat pumps are eligible for a tax credit of up to 30% of the cost, max of $2,000. In most cases, this must be your primary residence, rental properties and businesses do not qualify. 

How To Apply For A Heat Pump Tax Credit

Steps for homeowners to access tax credits and local incentives.:

  • Research available programs & rebates in your area
  • Understand eligibility requirements 
  • Calculate potential savings & benefits
  • Talk with a tax professional

Hiring a certified contractor like Jacobs means you get to work with a licensed, bonded, and insured professional without any unexpected surprises in their proposals. Certified contractors are well-versed in necessary permits and comply with all requirements. 

Document & Claim Your Tax Credit

To ensure you receive the full tax credits available, it’s crucial to retain all documentation and receipts of work carried out. To receive the energy credit, make sure to file Form 5695 (Residential Energy Credits Part II) when you file your taxes. Remember, the credit applies for the year you installed the qualifying products, not when you bought them. To maximize your tax credits make sure to check with a tax professional. 

Pro Tip: How To Maximize Your Home Energy Tax Credits

Take advantage of tax credits by spreading out your energy efficiency enhancements over a few years. The $3,200 annual limit and aggregate limits reset every year through 2032. Review your options on the Energy Star website to effectively combine these credits for significant savings. Remember to always seek guidance from your tax professional.

Jacobs Helps You Save Money

Upgrading your HVAC system doesn’t need to strain your budget. Researching your options could mean upgrading to a heat pump and reaping far-reaching energy bill rewards. 

Jacobs Heating & Air Conditioning provides services to help homeowners meet the eligibility requirements for these incentives, such as the Inflation Reduction Act tax credits. Since 1952,  the Jacobs team works hard every day to deliver the best service, the best quality, and the best value to homeowners while helping them save money. Let us review your programs with you and start making your home more comfortable and energy-efficient. Contact us today!

About the Author

Amanda Jacobs portrait

Amanda Jacobs, Internal Project Manager

Amanda Jacobs is an Internal Projects Manager and 3rd generation member of Jacobs Heating & Air Conditioning. She received her MBA from Seattle University and has worked for a leading HVAC training and consulting firm. When not talking HVAC on the Jacobs Blog, you can find her on the golf course or whipping up her famous vegan chili.