Did you purchase a heat pump for your home last year? If so, you may qualify for a tax credit. The Inflation Reduction Act gives qualifying taxpayers credits of up to $2,000 for upgrading to a heat pump, and if you made other energy-efficient adjustments to your home, you could save even more.
If you didn’t install a heat pump in tax year 2023, don’t worry. These credits are active through tax year 2032, and they’re available at slightly reduced rates for the two following years. Here’s an overview of the basics. Note that this is solely for information purposes and is not tax advice.
Federal Tax Credits for Heat Pumps
The IRS offers a tax credit of 30% of the cost of a heat pump, up to $2,000. For example, if you purchase a heat pump for $3,000, you can earn a credit of $900. That’s 30% of the cost of the heat pump. However, if you spend $10,000 on a heat pump, 30% is $3,000, which means that your credit maxes out at $2,000.
The credit is not refundable, which means that it can cover taxes you owe, but it cannot trigger a tax refund. If your credit exceeds your tax liability, you cannot roll the remaining amount to the following year.
Rules About the Heat Pump Tax Credit
According to EnergyStar.gov, you can claim the credit on air source heat pumps, heat pump water heaters, and qualifying biomass stoves and boilers. To qualify, the heat pump must have a thermal efficiency rating of at least 75%.
Additionally, you must install the heat pump in an existing home. Unfortunately, this credit is not available to people who put heat pumps in new homes. You also cannot claim this credit for putting a heat pump in a rental property that you own. You must live in the home where you install the heat pump.
Calculating the Tax Credit
The tax credit is based on the cost of the heat pump after you have subtracted public utility subsidies and rebates that meet all of the following conditions: 1) based on the cost of the property, 2) paid by the manufacturer, distributor, seller, installer, or another party connected to the sale, and 3) is not given to you for services you provided.
To illustrate, imagine that you pay $10,000 for a heat pump. Then, you receive a $2,000 rebate from MassSave. That makes your cost $8,000. As 30% of $8,000 is $2,400, you can claim the maximum tax credit of $2,000. These numbers are just for illustration, they do not illustrate the exact savings you may receive through MassSave.
You generally don’t have to reduce the cost by state tax incentives that you receive to install a heat pump. However, if the state incentive qualifies as a rebate, then, you must include that in your calculations. Note that this area can get murky. According to the IRS, many states call their incentives rebates, but the IRS doesn’t consider them to be rebates. Your tax preparer can help you with the details.
When to Claim the Tax Credit
You should claim the tax credit the year that you install the heat pump. For example, if you installed a heat pump in June 2023, you should claim the credit on your 2023 tax return which is due in 2024.
If you buy a heat pump one year but don’t install it until the next year, you should claim the credit the tax year that you install the pump. To explain, imagine that you purchased a heat pump in June 2023. You initially planned to install it yourself, but then, you realized the dangers of DIY installation so you hired a professional installer. They didn’t put in the heat pump until January 2024. In this case, you should claim the credit when you file your 2024 tax return in early 2025.
How to Claim the Heat Pump Tax Credit
Taxpayers should claim the tax credit on Form 5695. This form helps you calculate the tax credit for buying a heat pump. It also works you through other credits that you can earn for energy-efficient upgrades.
If you pay a tax preparer, they will fill out this form on your behalf. If you use tax prep software, the program will ask you questions about your energy-efficient home upgrades, and then, the software will fill out the form on your behalf.
To make sure that you get the credit, look through your copy of your tax return. If you don’t see Form 5695, ask your tax preparer why and make sure that you get the tax credit.
How to Save Even More
In addition to offering tax credits for heat pumps, the IRS also offers tax credits for the following energy-efficient home improvements: windows, skylights, doors, insulation, electrical panel upgrades, and home energy audits. You can claim up to 30% of the costs of these improvements, up to $1,200. The $1,200 stacks on top of the $2,000 max credit for heat pumps, meaning that you can get a credit of up to $3,200.
The IRS also offers a residential clean energy equipment upgrade which applies to both existing homes and newly constructed homes. This credit is 30% of the qualifying costs of small wind turbines, solar energy systems, fuel cells, and battery storage technology. You can claim this credit for improvements made to your primary home and your second home. If this credit exceeds your tax liability, you can roll it forward to future years.
Contact Us About Energy-Efficient Heat Pumps
Tax credits are a powerful incentive, but they’re not the only reason to invest in a heat pump. When you put a mini split in your home, you also enjoy enhanced comfort and energy savings. To learn more, contact us today.
At N.E.T.R., Inc., we are committed to helping our clients save money on heat pumps. When you select us to install your new heat pump, we’ll help you learn about local rebates and tax credits in the process.
