Heat pump incentives: A guide to tax credits and rebates from the IRA and beyond

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 lots of 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’ll be installing, 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.

All taxpayers: Heat pump tax credit up to $2,000

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

As an example of how you'd get the incentive: If you install a new heat pump in June 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’ll 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 done in the past with credits for electric vehicles and solar panels.

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

Some examples:

• If you spend at least $6,667 on your 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.

There are some finer points to this tax credit that you ought to know about if you’re thinking about making several electrification and high-efficiency upgrades all at once, or if you won't owe much in taxes. See more below.

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.

But as of March 2023, we aren’t certain of that full list. The Air Conditioning, Heating, and Refrigeration Institute (AHRI) have said that they will host a directory of all the eligible models on their website, but the page is still empty at the time of this writing. 

Here’s what we do know: 

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 depending on the region, and type of heat pump.

• In the South region, the criteria are simpler than in the North region.
• Ductless heat pumps also have higher efficiency standards than ducted heat pumps.
• In every case, the efficiency requirements are more stringent than the minimums set by the Department of Energy.

Several heat pump manufacturers have begun publishing lists of their qualifying models, which you can usually find by Googling the brand name plus something like "tax credit heat pump list."

You can also manually look up a specification list to see if your heat pump will qualify for the credit. This is pretty easy if you live in the South region, because you’ll only need to find the stats for SEER2 (cooling efficiency) and HSPF2 (heating efficiency). Those are basic stats, available on any manufacturer’s website. 

Specs for eligible heat pumps, South region:

In the North region, it's a little trickier. We’d recommend looking at the cold-climate heat pump database hosted by Northeast Energy Efficiency Partnerships (NEEP) to find specs like COP @ 5F (cold-weather heating efficiency) or Capacity Ratio @17F (general cold-weather performance).

Specs for eligible heat pumps, North region:

(When the Inflation Reduction Act was first passed, the efficiency requirements for eligible heat pumps were much stricter than they are now. The CEE revised their standards in late 2022, and far more heat pumps now qualify.)

All taxpayers: Efficiency & electrical upgrade credits up to $1,200

There’s a popular myth that if you want to install a heat pump, you’ll almost always need to upgrade your insulation, weather sealing, and electrical supply. Most of the time, this isn’t true. 

But some people actually will need a new electrical panel or service upgrade to support a heat pump (or electric vehicle, or induction stove, and so on). And it’s always a good idea to improve your home’s energy efficiency and maximize your energy savings, regardless of how you choose to heat and cool it.

To that end, the 25C Energy Efficient Home Improvement Credit also provides tax credits up to $1,200 total, or up to 30% of the project costs, whichever is less, for several energy-efficiency and electrical upgrades. Different types of improvements have different individual caps on the credits.

• Home energy audits, performed by licensed professionals: up to $150
• Insulation and air sealing, which meet recent performance criteria established by the International Energy Conservation Code (IECC): up to $1,200
• Electrical panel upgrades, installed in accordance with the current National Electrical Code (NEC) and providing at least 200 amps of service: up to $600

Credits are also available for doors and windows that meet Energy Star guidelines. 

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 you could be eligible for the full credit amount.
• The 25C credit cannot be carried forward from year to year if a portion goes unused. This is different from the 25D credit for rooftop solar panels and battery storage (and ground-source heat pumps), which can be carried forward. If you end up with a mix of credits from 25C and 25D—say, you paid for a heat pump, EV, EV charger, solar panels, and an electric panel upgrade in a single year—and you think some of them might go unused, a tax professional might be able to help you figure out a way to stagger the credits over more than one year to maximize your savings. 
• However, the 25C credit does reset every tax year. So for example, you could install a mini-split on your top floor in 2023 and claim up to $2,000, then switch the rest of your house to a heat pump in 2024 and claim up to $2,000 again.

Low or moderate household incomes: Rebates up to $14,000…eventually

The other big pro-heat pump incentive from the Inflation Reduction Act is the Home Electrification Rebates program. This hasn’t been implemented yet, and some of the details are still being hashed out. But here’s what we know so far:

Rebates might begin in late 2023, at least in some states. This is according to the “best guess” from advocacy group Rewiring America. The funds are federal money, but the rebates will be administered at the state and tribal level so the timing could vary across regions.

Rebates are available for heat pumps and related electrical upgrades: it’s for the cost of purchase and installation (and you can only claim as much as you spent on the product). Here are the products and services, and the size of their rebates – you’ll see two numbers: one for fully eligible low-income homes, the other for half-eligible moderate-income homes. (See more on eligibility below.)

• Heat pumps (air source and ground source): $8,000 / $4,000
• Electrical panel upgrades: $4,000 / $2,000
• New electrical wiring: $2,500 / $1,250
• Insulation, air sealing, ventilation: $1,600 / $800
• Heat pump water heaters: $1,750 / $875
• Electric stoves and cooktops (including induction): $840 / $420
• Heat pump clothes dryers: $840 / $420

Eligibility will depend on your household earnings. Since it’s up to individual states to administer the programs, there might be some modest differences in how your earnings are determined. But the IRA does include a few clear stipulations:

• Full rebates for households earning less than 80% of their area median income.
• Half rebates for households earning between 80% and 150% of the area median income.
• No rebates for households earning more than 150% of the area median income.

The total possible rebates per household: $14,000 for low-income households, and $7,000 for moderate income. So in the low-income tier, you can get $8,000 off of a heat pump, $4,000 off an electrical panel upgrade, $1,750 off a heat pump water heater, and still have $250 left to put toward something else. 

Rebates will be made available at the point of sale. That is, it’s a straight-up discount from your contractor or installer. You won’t have to put up all the money at installation, fill out a bunch of paperwork, and then wait weeks or months for your rebate check.

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 tax credits (see above). 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 is sure yet how these federally funded rebates will affect existing state or local rebates. According to industry experts, there’s nothing in the rule that prevents local, state, and federal rebates from being stacked. But now that states will be receiving federal money to subsidize heat pumps, they could choose to eliminate or reduce existing programs.

State, utility, or local rebates: It varies!

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—but 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 operating, which includes:

• Colorado
• Massachusetts

According to the Database of State Incentives for Renewables and Efficiency (DSIRE), 48 states and Washington DC have state-level or local utility 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 searching the name of your town and “heat pump incentives” to see what’s available.

What about heat pump water heaters?

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

Under the tax credit, the terms are the same as for HVAC heat pumps: Up to $2,000, or 30% of the cost of installation, whichever is less. Models that meet Energy Star efficiency standards are eligible.

But the available credit for a heat pump water heater comes out of 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 rebate program, the same income eligibility requirements apply. The maximum rebate amount is $1,750 for low-income households and $875 for moderate-income households. Energy Star water heaters are

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 of the 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.

What about geothermal or ground-source heat pumps?

These exceptionally efficient and long-lasting (but expensive) heating, cooling, and hot-water systems are eligible for the same low- and moderate-income rebates as air-source heat pumps (see above). 

But the tax credits can be much larger. Ground-source systems are eligible for the 25D Clean Energy Tax Credit, which provides a 30% tax credit on the cost of installation—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, but you can only claim it once. 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 along with utility companies might also have significant incentives for ground-source systems. 

Start shopping

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 some 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 heat pump shopping. Learn more here.