The federal Heat Pump Tax Credit is a credit that is meant to assist the U.S homeowners to afford the energy efficient heat pump installations.
This guide will give you information on eligibility, the amount of credit, claiming the credit, and how the Inflation Reduction Act of 2022 increased these benefits.
A summary table below provides the main facts about the heat pump tax credit in a nutshell.
| Feature | Details |
|---|---|
| Credit Amount | 30% of the costs of eligible heat pumps, up to $2,000 per year |
| Name of Program | Energy Efficient Home Improvement Credit (Section 25C), expanded by the 2022 Inflation Reduction Act |
| Eligibility | U.S. homes that are owner-occupied (in the majority of cases, it is the primary residence) and have a qualifying new heat pump installed |
| Period | Applicable to installations put in service between 2023 and 2032 |
| Annual Caps | Annual caps apply to heat pumps (in addition to a $1,200 cap on other energy improvements); no lifetime cap |
| Claiming Method | Claim IRS Form 5695 (Residential Energy Credits) with your tax return |
| Refundability | Non-refundable (credit can bring tax down to zero, but no refund of more than the tax due) |
Summary of the Federal Heat Pump Tax Credit
The federal tax credit on heat pumps is included in the Energy Efficient Home Improvement Credit, which promotes the installation of energy efficient improvements in homes. With the existing legislation, a homeowner is entitled to 30 percent of the price of a new heat pump, with a maximum of 2,000 dollars tax credit annually.
This credit is a direct reduction of federal income tax and can be claimed on qualifying heat pump installations on existing homes.
The credit was greatly expanded beginning in 2023 by the Inflation Reduction Act (IRA) of 2022.
In the past, the federal tax credits on heat pumps were significantly lower (limited to $300 on a heat pump system under the old regulations). As of now, homeowners are able to enjoy a significantly increased credit every year until 2032.
The heat pump credit is included within a total of $3,200 a year limit on energy efficiency tax credits ($2,000 of which is specifically limited to heat pumps and similar systems, and up to an additional $1,200 on other energy efficiency improvements).
The new credit has no lifetime limit as compared to the old lifetime cap, which means that you could claim new credits every year you make eligible upgrades.
The credit is however not refundable and therefore you cannot get more credit than your tax due in a particular year.
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Simply, the federal heat pump tax credit reduces the net cost of a high-efficiency heat pump installation.
Homeowners can save as much as 2,000 on the taxes of the year by claiming 30 percent of the cost of the project as a credit.
This incentive along with state and local incentives is meant to speed up the process of adoption of efficient electric heat pump heating and cooling in the country
Eligibility Requirements of the Heat Pump Tax Credit 2025
The homeowner and the equipment must satisfy some criteria in order to be eligible to the heat pump tax credit as defined by the IRS. Not all heat pump installations qualify, the house must qualify and the heat pump must be energy efficient.
The major eligibility criteria are as follows:
Home Eligibility
- Location: The place where the heat pump is installed should be in the United States.
- Existing Home: The credit can be taken only on the improvement of an existing home (including additions). New construction homes are not usually qualified.
- Main Residence: In the majority of cases, the house must be your main residence (where you live the majority of the year). The second homes can be qualified provided that you live there part of the year, but the rental properties (where you do not live) cannot be qualified to this homeowner credit.
- Personal Use: The credit is on personal homes. You cannot claim the residential credit on the property, if it is used solely as a business (e.g. a rental or commercial property). In case you use a part of your home in business (home office, etc.), you can deduct only that part of expenses that can be related to the non-business (personal) use.
Equipment Requirements Qualifying
- Qualifying Systems: The credit applies to new electric heat pump HVAC systems (air-source or ground-source) and heat pump water heaters. Biomass stoves and boilers also fall under the same category of $2,000 but in this case we are looking at heat pumps.
- Efficiency Standards: The heat pump should be efficient or better as per the set standards. In the case of air-source heat pumps, it must be the highest efficiency level (excluding advanced levels) of the Consortium for Energy Efficiency (CEE) during the year of installation. This, in practice, implies that the majority of the modern ENERGY STAR-certified heat pumps will be eligible.
Beginning in 2025, the requirements become stricter: only heat pumps that are identified as ENERGY STAR Most Efficient (including some cold-climate models) will meet the requirements.
It is the responsibility of homeowners to ensure that the model of heat pump installed is eligible to the tax credit with their contractor or manufacturer in the year of installation.
- New and Installed: The equipment should be new (not used or re-used) and should be installed in the home of the taxpayer. You can not take the credit of portable heat pumps or non-permanent installations.
The cost of labor to install the heat pump may be claimed as part of the eligible cost of this credit (not all insulation or window projects allow the labor to count).
- Manufacturer Certification: As of 2025, every eligible heat pump will require a Product Identification Number (PIN) issued by the manufacturer to receive the credit. The manufacturers will have to certify their products and provide a PIN as a qualification certificate. That number will be required to be added to the tax return of the taxpayers.
This reform is supposed to make sure that only the high-efficiency models that are compliant get the credit.
Limitations & Amount of Credit
The heat pump tax credit enables homeowners to take a tax credit of 30 percent of the total cost of the project with a maximum of 2,000 dollars in tax credit per year. This is in the total cost of purchasing and installing the heat pump system (together with any associated electrical upgrades, as the case may be). One should know how the boundaries and regulations operate:
- Annual Cap of Heat Pumps:
Regardless of the cost of the heat pump project, the heat pump credit is limited to $2,000 in a single tax year. - Other Improvement Cap of $1,200:
The law also establishes a separate $1,200 annual cap on other forms of energy efficiency improvements such as insulation, windows, doors and energy audits. This 1200 dollar limit is independent of the 2000 dollar heat pump limit. You may also get up to 1200 dollars in other upgrades in a year that you claim a heat pump credit, so a total of 3200 dollars in credits in case you did several projects. - No Lifetime Cap:
The current credit does not have a one-time lifetime limit as the pre-2023 program did. You can claim the credit each year so long as you make qualifying improvements each year. That is, you may take a $2,000 heat pump credit in 2024 and again in 2025 (if you put in another qualifying system in a different property or an upgrade) - Non-Refundable Credit:
The heat pump credit is non-refundable, which means that it can only bring your federal income tax to zero, but it will not cause a negative tax or refund in excess of what you owe. As an example, suppose you are entitled to the full $2,000 credit but you only pay $1,500 in taxes during the year, you can only apply the credit to the amount of taxes you paid, i.e. $1,500 (and the rest of the credit, i.e. the other $500 is basically wasted, it can not be refunded or carried forward). Thus, you must have at least equal tax liability as the amount of credit in that year to maximize the benefit. - Interaction with Rebates/Subsidies:
In case you got any rebates, discounts, or incentives that directly decreased the price of the heat pump installation, the IRS views them as a decrease in the price of purchase to compute the credit.
As an example of the amount of credit: imagine that a homeowner installs a qualified heat pump system that costs 7,000 dollars. That cost is 30 percent of which is 2,100 and the credit allowed is limited to 2,000 hence they would claim a credit of 2,000.
In case another homeowner installs a smaller ductless heat pump at a cost of $4,000, 30 percent of the cost is 1,200, and the homeowner can claim the entire 1,200 (within the 2k limit).
These are summarized in the table below:
| Heat Pump Project Cost | 30 percent Credit Calculation | Tax Credit Allowed |
|---|---|---|
| 4,000 | 1,200 | 1,200 (30 percent credit in full) |
| 7,000 | 2,100 | 2,000 (max 2k) |
| 10,000 | 3,000 | 2,000 (max 2k) |
The credit is a good way of lowering the net cost of the heat pump.
You should remember that you can only claim the credit of the tax year in which the installation is completed and the system is placed in service, just buying a heat pump does not count until it is installed and running.
State and Local Incentives for Heat Pumps
In addition to federal tax credit, homeowners are advised to be familiar with state, local and utility incentives that can further decrease cost of heat pump installations.
These incentives may frequently be applied in conjunction with the federal credit (but some may have the effect of reducing the amount of the federal credit in effect when they are manufacturer or utility rebates).
The following are some of the methods of getting extra savings:
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State and Utility Rebates:
A wide variety of state energy agencies and electric utilities have rebates to install high-efficiency heat pumps. Depending on the program, such rebates may be a few hundred dollars or several thousand dollars.
As an example, certain utility programs offer rebates of the magnitude of 500 to 1000 dollars per ton of heat pump capacity. Suppose that a standard residence requires a 3-ton heat pump, it might translate to a rebate of 1,500 to 3,000 dollars by the utility.
These rebates are normally provided in the form of a check or bill credit following installation and use. To find out about heat pump rebate programs check with your state energy office or your local utility company.
State Tax Credits:
Some states also offer a tax credit or deduction program on energy-efficient home improvements.
Although not as frequent as rebates, in some years, states such as Maine or Colorado (to give two examples) have provided tax credits on heat pumps.
Tax credits offered by states will differ according to states and may include various rules and funding amounts. Check the department of revenue or energy department web site in your state to see whether there are any state-level tax incentives to heat pumps.
Inflation Reduction Act Rebates (HEEHRA)
The federal IRA did not only increase tax credits, but also established the High-Efficiency Electric Home Rebate Program (also known as HEEHRA) that will be run by state energy offices.
This is not a tax credit but an up front rebate to qualifying households.
HEEHRA is aimed at low- and moderate-income families and may offer considerable discounts on the installation of heat pumps.
Actually, the low-income households that qualify may cover up to 100 percent of the cost of the heat pump (up to a maximum of $8,000 on a heat pump system), whereas moderate-income households can cover 50 percent of the cost (also to a limit).
Such rebates will be implemented once they are available either at point-of-sale or after installation through programs run by the states. States are currently rolling out these IRA-funded rebate programs as of early 2024.
The availability of the program is the latest information that should be checked by homeowners at their state energy office or at the Home Energy Rebate Program information in the Department of Energy.
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In the event that you are qualified, a HEEHRA rebate may be utilized alongside the federal tax credit and this will significantly reduce the amount you will have to pay out-of-pocket.
Database of Incentives:
The Database of State Incentives for Renewables & Efficiency (DSIRE) is a helpful tool, an online directory of energy incentive programs by state.
Using DSIRE, you can search your state and the term heat pump to get a list of all the available rebates, tax credits, or grant programs in your area in a single list.
This can assist in making sure that you are not leaving money on the table in the form of local programs that can be stacked with the federal credit.
Since the incentives may vary or be modified, it is prudent to conduct some research or consult a qualified HVAC installer who knows programs in your area.
Utility rebate forms or state programs are known to many contractors and they can help with the paperwork.
When the federal heat pump tax credit is used in conjunction with state/utility rebates or the soon to be available federal funded rebates the price of a new heat pump system can be significantly lowered to many homeowners.
The presence of several incentives in combination highlights the determination of all levels of government to advance energy-efficient heat pump technology.
How to Get the Best Heat Pump Prices?
- Firstly, keep in mind that installation quality is always the most important thing for heat pump project. So never sacrifice contractor quality for lower price.
- Secondly, remember to look up the latest tax credit and rebates.
- Thirdly, ask for at least 3 bids before you make the decision. You can click here to get 3 free estimates from your local contractors, and this estimate already takes rebates and tax credit into consideration and filter unqualified contractors automatically.
At last, once you chose the right contractor, remember to use the tactics from this guide: homeowners tactics when negotiating with HVAC dealer to get the final best price.
