There’s no denying that life has gotten more expensive over the last few years, so upgrading your home might feel out of reach. But what if you could lower your energy bills and make your home more sustainable without stretching your budget too far? The Inflation Reduction Act (IRA) makes that possible by introducing a range of tax credits and incentives designed to support homeowners in making climate-friendly choices.
The IRA, passed in August 2022, is the largest climate legislation in U.S. history. It is designed to help homeowners cut energy costs while contributing to a cleaner environment. One key focus of the IRA is home electrification, including upgrades like heat pumps, which are among the most efficient ways to heat and cool a home.
In addition to electrification, the IRA also supports a wide range of home improvements, from better insulation to upgraded appliances, all aimed at making homes more efficient and comfortable. These incentives are designed to help offset the upfront costs and make it easier to get started on changes that can have a real impact on your home and your wallet.
So, if you’ve been thinking about making your place more energy-efficient, now is the perfect time to explore your options. In this guide, we’ll break down the tax credits, explain how to qualify for heat pump incentives, and help you see how these benefits can work for you. Read on to discover how Elephant Energy and IRA certification incentives can help make your home greener and more affordable without adding to the stress of rising costs.
Federal Tax Credits for Heat Pumps
If you’re anything like the millions of Americans who have seen their energy costs skyrocket over the last few decades, you’re probably thinking about making your home more efficient. Maybe you’ve looked into upgrading your windows, improving your insulation, or installing solar panels. All great options, but heat pumps are hard to beat when it comes to getting the most bang for your buck—while staying comfortable year-round.
What makes heat pumps so special? For one, they’re among the most efficient ways to heat and cool your home, saving energy and cutting your utility bills significantly. Instead of burning fuel, heat pumps work by transferring heat. In winter, they pull heat from the air outside (even when it’s cold) to warm your home. In summer, they reverse the process to keep your space cool and comfortable.
This shift to efficient, electric-powered technologies like heat pumps is part of a broader push for electrification and the fight against climate change. Electrification involves replacing systems that rely on fossil fuels with those powered by cleaner electricity, reducing greenhouse gas emissions and supporting a greener future. And the IRA’s tax credits for heat pumps are a great way to make this transition more affordable for all.
| Check out our Electrification Roadmap to see how we guide you step-by-step through the process of home upgrades. |
What Is a Tax Credit?
A tax credit is a practical, easy, and completely legal way to reduce your tax bill. Unlike a tax deduction, which lowers your taxable income, a tax credit directly subtracts a set amount from the taxes you owe. For example, if you owe $5,000 in taxes and qualify for a $2,000 tax credit, your bill drops to $3,000—simple as that.
These federal tax credits under the IRA are designed to make energy-efficient upgrades like heat pumps more affordable by offsetting the upfront costs. The government’s goal is to encourage more households to adopt cleaner, energy-saving technologies, which not only benefit you by lowering your energy bills but also contribute to reducing overall energy consumption and emissions.
Inflation Reduction Act Heat Pump Qualifications Explained
You must have a federal tax liability to qualify for the IRA tax credits for heat pumps. This means you need to owe federal income taxes to benefit from the credit. While there’s no income limit for this credit, the amount you can claim depends on your tax liability. If you owe little to no federal income tax, the credit may not fully apply. The good news? Taxpayers with a qualifying liability can apply for these credits to make energy-efficient upgrades more affordable.
Another thing to keep in mind is that not all heat pumps qualify for the IRA tax credit. To make sure the credit is used for truly energy-efficient products, the IRA sets specific standards that eligible heat pumps must meet. These include:
- Energy Efficiency Ratings: The heat pump must have a high SEER (Seasonal Energy Efficiency Ratio) rating, which measures cooling efficiency.
- CEE Tiers: The heat pump must be in the Consortium for Energy Efficiency’s (CEE) highest non-“advanced” tier. This rating confirms the equipment meets strict efficiency and performance benchmarks.
Elephant Energy’s heat pumps check all the boxes for IRA tax credit eligibility. They’re built with high SEER ratings and meet the Consortium for Energy Efficiency’s highest non-“advanced” tier, which means they’re made to perform and designed to maximize energy savings in your home.
How to Apply for IRA Tax Credits and Incentives for Heat Pumps
If you choose to install an energy-efficient heat pump in your home, you may be eligible for an IRA tax credit covering up to 30% of the pump’s cost and installation. Here’s how to get started:
- Check Your Eligibility
Start by confirming that you qualify for the credit. This includes verifying your tax liability and making sure the heat pump you’re considering meets the IRA’s energy efficiency and CEE tier requirements. - Choose the Right Heat Pump
Work with a trusted supplier like Elephant Energy to select a heat pump that qualifies for the IRA tax credit. Be sure to ask for product certification details and confirm that the system meets the required energy efficiency standards. - Save All Documentation
Keep all receipts, invoices, and product certifications. You’ll need proof of purchase and installation, as well as documentation showing the heat pump’s eligibility based on energy ratings and other criteria. - Fill Out the Necessary IRS Forms
When it’s time to file your taxes, you’ll need to complete IRS Form 5695 to claim the Residential Energy Efficiency Property Credit (25C). You might also need to explore the Residential Renewable Energy Credit (25D) for more comprehensive electrification projects. - Submit Your Tax Return
Include Form 5695 (or 25D) with your annual tax return, along with all supporting documents. - Consider Consulting a Tax Professional
If you’re unsure about any part of the process or want to maximize your benefits, consider consulting a tax professional to ensure you’ve met all requirements and claimed the eligible credits.
Energy Efficient Home Improvement Tax Credits
As the largest investment the U.S. government has ever made towards greenhouse gas reductions, the 25C Residential Energy Property Credit allows you to offset the cost of improvements like heat pumps, insulation, and windows, directly lowering your tax bill and effectively putting money back in your pocket. Two of its biggest benefits include:
Up to $2,000 in Savings
The 25C credit covers up to 30% of the cost of purchasing and installing qualifying energy-efficient equipment. For heat pumps, this can mean up to $2,000 back in tax credits. For other upgrades, like insulation or high-performance windows, you can get up to $1,200 annually.
Here’s how it works: let’s say you install a heat pump that costs $6,000. With a 30% credit, you could get $2,000 back, bringing your out-of-pocket cost down to $4,000. Adding insulation or upgrading your windows in the same year might qualify you for additional credits up to the $1,200 limit. This makes it easier to combine upgrades while still saving money.
Use More Than Once
But perhaps the best part is that you can claim the 25C credit year after year. This means you can plan your energy-efficient upgrades over time and maximize your savings without hitting a lifetime cap.
For example, you could install a heat pump this year and claim up to $2,000, then focus on upgrading your insulation or windows next year to claim up to $1,200. Spacing out your improvements like this lets you tackle one project at a time while still making the most of the available incentives.
Residential Clean Energy Credit
The 25D Residential Clean Energy Credit is another feature of the IRA that makes renewable energy investments more accessible. It specifically supports clean energy systems like rooftop solar panels, battery storage, and geothermal heating, giving you a simple way to offset the cost of purchasing and installing these technologies.
Unlike the 25C Energy Efficient Home Improvement Credit, which has caps and annual limits, the 25D credit is uncapped. This means there’s no maximum limit on how much you can claim, making it ideal for large-scale projects like solar installations or geothermal systems. Other features include:
Tax Credit of 30%
With the 25D Residential Clean Energy Credit, you can claim 30% of the total cost of qualifying systems. This includes both the purchase and installation of technologies such as:
- Rooftop solar panels
- Battery storage
- Geothermal heating
- Cooling systems
- Fuel cells
- Small wind turbines
For example, if you install a solar panel system costing $25,000, you could claim a $7,500 credit, directly reducing your tax liability by that amount. With no cap, even larger projects benefit fully from the 30% credit.
Can Be Combined with State and Local Incentives
Plus, you’re not limited to just federal savings. The 25D credit can often be combined with state, local, or utility company incentives, further reducing the upfront cost of your renewable energy system. For example, some states offer rebates or additional tax credits for solar installations, which can stack with the federal credit to maximize your savings.
Pair it with 25C
You can claim 25D and 25C credits if you make qualifying upgrades. For instance, you could claim the 25D credit for installing a rooftop solar system and the 25C credit for adding an energy-efficient heat pump. Just make sure each system meets the specific criteria for its respective credit and keep all necessary documentation.
Tax Credits and Incentives in Your State
If you’re upgrading to energy-efficient systems like heat pumps, the smartest way to go about it is exploring all available incentives in your area, particularly because many states offer additional tax credits and rebates that can be combined with federal programs to maximize your savings. Here’s how energy-efficient home improvement tax credits work in Colorado and Massachusetts.
Energy Efficient Home Improvement Tax Credits: Colorado
Colorado offers several incentives to encourage the adoption of energy-efficient technologies, including heat pumps. Here are some of the most noteworthy programs available:
Home Electrification and Appliance Rebate Program (HEAR): A program offering rebates for installing energy-efficient appliances, including heat pumps.
- Availability: Check with the Colorado Energy Office for current status and application periods.
- Eligibility: Open to Colorado residents with low-to-moderate incomes undertaking qualifying home electrification projects.
- Benefits: Rebates vary based on the appliance and project scope.
- Qualifications: Appliances must meet specified energy efficiency standards.
Home Efficiency Rebate program (HOMES): Provides incentives for comprehensive home energy efficiency retrofits.
- Availability: Refer to the Colorado Energy Office for details on the current program.
- Eligibility: Homeowners implementing whole-house energy-saving measures.
- Benefits: Rebate amounts depend on the level of energy reduction achieved.
- Qualifications: Projects must result in significant energy use reductions.
Utility Rebates: Some utilities offer rebates for heat pump installations.
- Availability: Ongoing; consult your utility provider for specifics.
- Eligibility: Customers of participating utility companies.
- Qualifications: Equipment must meet efficiency criteria set by the utility.
Weatherization Assistance Program: Assists low-income households in improving home energy efficiency.
- Availability: Year-round, subject to funding.
- Eligibility: Income-qualified Colorado residents.
- Benefits: Services include insulation, heating system upgrades, and more.
- Qualifications: Eligibility based on income and household size.
Local Government Rebates: Some municipalities offer additional incentives for energy-efficient upgrades.
- Availability: Varies by locality; check with your local government.
- Eligibility: Residents within the municipality offering the rebate.
- Benefits: Rebate amounts and eligible projects differ by program.
- Qualifications: Typically require adherence to local energy efficiency standards.
Energy Efficient Home Improvement Tax Credits: Massachusetts
Massachusetts leads the way in offering comprehensive energy credits, rebates, and incentives. Here are some of the most popular programs:
Mass Save: A collaborative initiative providing rebates and incentives for energy efficiency.
- Eligibility: Available to residents served by participating utilities.
- Benefits:
- Whole-Home Cold-Climate Heat Pump: Up to $10,000.
- Income-Based Enhanced Rebates: Up to $16,000 for whole-home systems.
- Partial-Home or Supplemental Heat Pump: Up to $1,500 per ton.
- Free Home Energy Assessment: Available to all homeowners.
- Free or Discounted Insulation: Accessible to all homeowners.
- Qualifications: Equipment must meet specific efficiency standards and be installed by approved contractors.
HeatSmart Alliance: Community-based program promoting clean heating and cooling technologies.
- Eligibility: Residents of participating communities.
- Benefits:
- Up to $10,000 for air-source heat pumps (ASHPs)
- Up to $15,000 for ground-source heat pumps (GSHPs)
- ENERGY STAR® Cold Climate 6.1 certification: Heat pumps must be certified to qualify for rebates.
Mass Save Heat Pump Installer Network (HPIN): A directory of qualified contractors approved to install Mass Save-eligible heat pumps.
- Benefits: Ensures quality installations and access to rebates.
- Eligibility: Homeowners using HPIN-listed installers.
- Qualifications: Work must meet Mass Save program standards.
Maximize Tax Credits and Comfort With Efficient Heat Pumps From Elephant Energy
Choosing an energy-efficient heat pump supported by federal IRA tax credits and state incentives is one of the best ways to lower your energy bills and reduce environmental impact. And federal programs like the 25C and 25D credits, combined with state incentives in places like Colorado and Massachusetts, are now making these upgrades more affordable than ever.
But what’s important to remember here is that the benefits go beyond just savings. Heat pumps improve your home’s comfort and efficiency and improve your home’s air quality while significantly cutting energy use. To make the most of these programs, explore all available rebates and credits to maximize your savings.
Take the first step toward long-term savings and a more sustainable, efficient home. Contact Elephant Energy for a consultation and get the assistance you need to maximize available incentives, cut your energy bills, and transform your home with a high-performance heat pump.