Heat pump incentives: Save big on clean HVAC

Heat pumps are a win-win: great for homeowners, great for the environment, and sometimes even good for the electrical grid. These high-efficiency, super-comfortable, all-electric home heating and cooling systems use much less energy than traditional HVAC equipment and can run entirely on renewable energy.

So it makes sense that governments and utilities want heat pumps in more homes—and they're giving away a ton of money to help make that happen. The broadest program is the Inflation Reduction Act, passed by the federal government in 2022. But many states and even local governments have their own subsidies, too.

How much can you save with these incentives? It depends on where you live, what sort of heat pump you install, and your household income. Here's a guide to all the free money you might be able to claim when you add a heat pump to your home.

As of January 1, 2023, if you install a new air-source heat pump in your primary residence, and it meets certain efficiency requirements, you'll be eligible for a federal tax credit of up to $2,000, or 30% of the installation cost, whichever is less. Nice! (Ground-source / geothermal heat pumps are covered under a different tax credit.)

So, if you add a new heat pump in November 2023, you'll claim the credit when you file your tax returns in early 2024. It's officially known as the 25C Energy Efficient Home Improvement Credit, and you use IRS Form 5695 for the claim. Tax-prep software like TurboTax might be able to guide you toward the right steps as well, as they've previously done with credits for electric vehicles and solar panels.

Small mini-splits count, too

Single-zone or partial-home mini-split heat pumps are eligible for the heat pump credit, as long as the equipment meets efficiency requirements. Again, it does not need to be a whole-house heat pump. Even a small ductless mini-split heat pump you'll mostly use for cooling can be eligible. 

Rebate examples

• If you spend at least $6,667 on your qualified heat pump installation (which is at the low end of what a whole-house system costs), you can claim the full $2,000 credit.

• If you spend less than that amount, you'll multiply the amount you paid by 0.3 — and that's how much you can claim. For example, say you paid $3,500 for a one-zone mini split. $3,500 x 0.3 = a $1,050 tax credit.

Which heat pumps are eligible for the tax credit?

To qualify for the federal tax credit, your heat pump needs to meet some efficiency requirements. They're not too stringent, and it looks like a nice long list of models will meet all the criteria.

Eligible heat pumps need to meet requirements set by the Consortium for Energy Efficiency (CEE), a nonprofit organization that develops efficiency standards and programs across loads of product categories. The required specs are published here and vary by the type of heat pump and the region (north or south, look up your state here). In every case, the efficiency requirements are more stringent than the minimums set by the Department of Energy.

Required specs, South region:

Required specs, North region:

You can find the SEER2 and HSPF2 ratings on any manufacturer’s website. To find specs like COP @ 5F (cold-weather heating efficiency) or Capacity Ratio @ 5F (general cold-weather performance), we'd recommend looking at the cold-climate heat pump database hosted by Northeast Energy Efficiency Partnerships (NEEP) .

Some finer points on the 25C tax credits

Looking to maximize all the possible tax credits as you upgrade your house? Here are some details to keep in mind:

• The full 25C credit will be available through 2032. So you've got some time. The credit gets smaller in 2033, and smaller still in 2034, before it will be phased out entirely (or that's the plan for now, anyway). 

• This is a tax credit, so you can only claim as much money as you owe to the IRS. For example, if your tax liability is only $1,500 for the year, you'd only be able to claim $1,500 in credit. According to IRS stats reported by Insider, if your household income is greater than $40,000, you probably owe at least $2,000 in federal taxes per year so that you could be eligible for the total credit amount.

• The 25C credit cannot be carried forward from year to year if any portion goes unused. If you install a heat pump in 2023 and it’s eligible for the full $2,000 rebate, but only owe $1,500 in taxes that year, you cannot claim the other $500 in 2024. (This is different than the 25D credit for solar, batteries, and more. Doing a lot of electrification? Talk to a tax pro for help spreading out your 25C and 25D credits over time for maximum savings.) 

• You can claim the full value of the 25C every year that you install a new qualified heat pump. For example, you could install a supplemental mini-split for a bonus room in 2023 and claim up to $2,000, then switch your home’s main heating and cooling system to a heat pump in 2024 and claim up to $2,000 again, on and on until the tax credit expires in the 2030s. 

• You generally cannot claim the 25C tax credit for rental properties or vacation homes. Sorry, landlords. There are likely other incentive programs that can help reduce your costs, though.

• Lots of other home efficiency and electrification upgrades are covered under the 25C credit.  Heat pumps work best in a well-insulated, air-sealed home, and you can claim an additional $1,200 tax credit toward those upgrades (up to 30% of the cost). You also might need to upgrade your electrical panel to 200 amps of service to accommodate a heat pump, which is eligible for another $600 / 30% tax credit. Credits are also available for doors and windows, and you can even claim a $150 / 30% tax credit for a home energy audit. 

• Heat pump water heaters also often qualify for up to $2,000 in credits. That said, heat pump water heaters generally don’t cost enough to qualify for the full $2,000, so the credit will be 30% of whatever you end up paying. Whatever the amount, it comes out of the same bucket as the HVAC heat pump credit, so you’ll want to stagger the upgrades across multiple years, if possible, to maximize your savings. 

More details on all of these credits, and how to qualify for them, are spelled out at the IRS website.

The other big heat pump incentive from the Inflation Reduction Act offers direct, point-of-sale discounts of up to $8,000 for low-income households and $4,000 for moderate incomes.  This program has commonly been called the High-Efficiency Electric Homes Rebate Act, but the official name now seems to be the Home Energy Rebates Program. Either way, it should roll out in most states over the next few years. 

This could be a tricky incentive to get your hands on, for a few reasons: 

• Eligibility depends on household income. Households under 80% of the area median income qualify as low income, and can be eligible for the full $8,000. Households up to 150% of the median are moderate income and could get $4,000. Above 150%, you’re ineligible. (Another $6,000 / $3,000 is available for other electrification-related upgrades.) How do you prove income? It might vary from state to state.

• The program only has enough funding for a few hundred thousand households. The US has about 124 million households. About 40% of them qualify as low-income, so almost 50 million households. If the entire $4.5 billion program budget went to low-income households, $8,000 at a time, it would cover just 562,500 homes. If those households claimed the full $14,000 for the heat pump and other electrification upgrades, that’s only 321,428 homes. 

• You can’t just claim the rebates on a form, like you can with the IRA tax credit or some local-level heat pump incentives. The process flows through qualified contractors who must get approval from the state energy office…it’s a lot of steps that are largely out of the consumer’s hands. 

• It could be years before the rebates are available in some states. For example, in a webinar by advocacy group Rewiring America in August 2023, we learned that Vermont doesn’t plan to open this program until 2025 because their energy office is already busy administering state-level incentives. Florida governor Ron DeSantis declined entirely to accept any federal funding for new efficiency programs in his state.

A few other points of note:

• Heat pumps need to meet Energy Star standards to qualify. These rules aren't quite as stringent as the CEE standards for the heat pump tax credits (see above). It's also easy to identify the qualified models. —manufacturers and retailers tend to make it obvious in their product listings, and you can also look up the model number on the Energy Star database.

• You can claim these rebates and the 25C tax credits. In theory, you could combine the $8,000 heat pump rebate and a $2,000 tax credit to get $10,000 off a heat pump—that is, as long as the heat pump meets the stricter CEE efficiency guidelines, and your tax liability is at least $2,000 for the year.

• Nobody knows how these federally funded rebates will affect existing state or local rebates. According to industry experts, there's nothing in the rule that prevents you from stacking local, state, and federal rebates. Now that states will receive federal money to subsidize heat pumps, they could choose to eliminate or reduce existing programs.

• A different bucket of money from the IRA could also subsidize heat pump installations. A separate program, known as Home Efficiency Rebates, also offers up to $8,000 for retrofits to existing homes that reduce the overall energy consumption. Insulation, high-efficiency heating systems (eg. heat pumps), and other pro-efficiency upgrades could all qualify—but the details are very uncertain for now.

Loads of heat pump and electrification rebates and incentives are available at the state and local levels, or through utility companies. Programs range from a few hundred dollars up to a whopping $10,000—it all depends on where you live.

In general, you should be able to claim both the federal incentives and any state, local, or utility incentives.

For now, we're tracking all the incentives available in the states where the EnergySage Heat Pump Marketplace is open, which includes:

• Colorado

• Massachusetts

• California

• Florida

According to the Database of State Incentives for Renewables and Efficiency (DSIRE), 48 states and Washington DC have state-level or utility-level incentives. (Alaska and West Virginia are the only two states with no heat pump-related entries in DSIRE, at the time of writing.) We'd recommend starting your search with DSIRE, filtering down to your state, and then typing "heat pump" into the search box. 

But DSIRE isn't a complete list—it leaves out county, city, and town programs. For example, a quick Google search reveals that Juneau, Alaska does have a pretty substantial heat pump subsidy available for low- and moderate-income residents. Try Googling the name of your town and "heat pump incentives" to see what's available.

Heat pump water heaters also qualify for the federal 25C tax credit and the Home Energy Rebates program. 

Under the tax credit, the terms are the same as for HVAC heat pumps:

• Up to $2,000, or 30% of the installation cost, whichever is less.

Models that meet Energy Star efficiency standards are eligible.

But the available credit for a heat pump water heater comes from the same "bucket" as the HVAC heat pumps. It's a total of $2,000 per year. So if you install both in the same year, your total tax credit cannot be more than $2,000. But the credit does reset annually: if you install one type in 2023, and then the other type in 2024, you can claim up to $2,000 each year. 

Under the income-eligible rebate program, the same income requirements as above apply.

• Up to $1,750 for low-income households and $875 for moderate-income households.

The heaters need to meet Energy Star standards.

So if you stack the two incentives together, you could be eligible for up to a $3,750 rebate—not bad, considering that's more than even the high-end range for water heater installations, according to most home services sources. And if you need electrical work to make the switch, don't forget that’s also eligible for credits and rebates. State, local, or utility-based incentives could be available, too. above

These exceptionally efficient and long-lasting (but expensive) heating, cooling, and hot-water systems are eligible for a much larger tax credit than air-source heat pumps (see above). 

This technology is covered by the 25D Clean Energy Tax Credit, which provides a 30% tax credit on the installation cost—with no limit. (It's the same credit that covers solar panels and battery storage systems.)

So if you spend $30,000 on a ground-source system, you'll get a $9,000 credit. It can be carried forward across multiple years. The 25D credit stays at 30% through 2032, at which point it drops to 26% in 2033, and 22% in 2034.

State and local governments and utility companies might also have significant incentives for ground-source systems. 

When you sign up for the EnergySage Heat Pump Marketplace, you'll get an instant estimate of how much it might cost to install a heat pump in your home, based on real-world quotes for similar homes from vetted installers. You can schedule consultations with seasoned pros. And if you want independent guidance, one of our Energy Advisors can help you through the process. We're already the country's largest marketplace for solar energy, and now we've brought that clean-energy experience to shopping for a heat pump. Learn more here.