How Do I Take Advantage of the New Heat Pump Tax Credits Under the Inflation Reduction Act?
With more clarity around tax credit eligibility for heat pumps under the Inflation Reduction Act (the IRA), we’ve put together a step-by-step guide for how you can take advantage of the incentives for a new heat pump system. As a refresher, tax credits of up to $2,000 are available to all households regardless of income for heat pumps under the IRA.
The IRA also includes rebates, but these are geared towards low and middle income households and are not expected to be available until 2024.
Read on to find out more about how to take advantage of the tax credit!
We also invite you to try our online instant quote, which provides customized heat pump system recommendations and upfront online pricing, as well as easy to understand explanations around key considerations when looking for a heat pump system.
Important note: as the following is provided for informational purposes, please make sure to consult your tax professional for further information before making a purchase.
Heat Pump IRA Tax Credits - A Quick Guide
Step 1: Figure out what type of system is right for your home.
There two major types of heat pumps – ducted or ductless. Generally, if your home already has ductwork for a forced air system, a ducted system will be better. On the other hand, if you home doesn’t have ductwork (i.e. wall heaters, baseboards or radiant heat) a ductless system (also referred to as mini-splits) will be a better choice.
Try our online instant quote for upfront online pricing and personalized recommendations for your home.
Step 2: Make sure to choose a system that qualifies for the tax credit.
You can receive 30% of the installation cost up to $2,000 as a tax credit for a qualifying heat pump system. There are no income requirements, but since the goal of the Inflation Reduction Act is to promote energy efficiency, only high efficiency heat pumps and mini-splits qualify for the tax credit under the Inflation Reduction Act.
The relevant efficiency criteria differ depending on whether you are in the “North” or “South”, so first you need to see which geographic area you are in for the purpose of the tax credits.
Once that is determined, you need to choose a system that meets or exceeds all of the following criteria.
North Regions, Ducted Heat Pumps
SEER2 ≥ 15.2
EER2 ≥ 10.0
HSPF2 ≥ 8.1
COP at 5F ≥ 1.75
Capacity Ratio (17F/47F) ≥ 58% or Capacity Ratio (5F/47F) ≥ 70%
North Regions, Non-Ducted Heat Pumps (i.e. “ductless mini-splits”)
SEER2 ≥ 16.0
EER2 ≥ 9.0
HSPF2 ≥ 9.5
COP at 5F ≥ 1.75
Capacity Ratio (17F/47F) ≥ 58% or Capacity Ratio (5F/47F) ≥ 70%
South Regions, Ducted Heat Pumps
SEER2 ≥ 15.2
EER2 ≥ 11.7
HSPF2 ≥ 7.8
South Regions, Non-Ducted Heat Pumps (i.e. “ductless mini-splits”)
SEER2 ≥ 16.0
EER2 ≥ 12.0
HSPF2 ≥ 9.0
Check out our online instant quote to see qualifying systems and prices in just 20 seconds!
Step 3: Install the system.
All systems that are installed after January 1, 2023 through 2032 and meet the relevant criteria are eligible for the tax credit.
Step 4: Claim the credit on your tax return.
Don’t forget to claim the tax credit on your tax return!
Also, remember that you will need to have a tax liability in order to take advantage of the credit and the credit is nonrefundable.
You will need to file form 5695 to claim the tax credit (officially called the Residential Energy Efficient Property Credit). There are no income requirements to be eligible for the tax credit. Consult your tax advisor as necessary.
General Information About Tax Credits
What is a tax credit?
Tax credits directly reduce the amount of taxes owed. They are a type of tax incentive that allows taxpayers to subtract a certain amount from the taxes they owe to the government. Tax credits are different from tax deductions, which reduce the amount of income that is subject to tax.
There are two types of tax credits: refundable and non-refundable.
A non-refundable tax credit can only reduce the amount of taxes owed to zero. Any remaining credit cannot be used to receive a refund. The Energy Efficiency Home Improvement Tax Credit under the IRA is a non-refundable tax credit.
A refundable tax credit can reduce the amount of taxes owed to zero and any remaining credit can be used to receive a refund from the government.
For example, if a taxpayer owes $1,000 in taxes and has a $1,200 non-refundable tax credit, the taxpayer's tax liability would be reduced to zero. However, the remaining $200 would not be refunded to the taxpayer.
On the other hand, if the credit was refundable, the taxpayer would receive a refund of $200 from the government.
Make sure to consult with a tax professional to make sure that you are eligible for any tax credits that you plan to claim.
What is the difference between a tax credit and a rebate?
A tax credit and a rebate are both financial incentives that can help reduce the cost of certain purchases, but they work in different ways.
A tax credit is a dollar-for-dollar reduction in the amount of taxes owed to the government. Tax credits can be claimed on a taxpayer's annual tax return and can directly reduce the amount of taxes owed. For example, if a taxpayer owes $1,000 in taxes and has a $1,000 tax credit, their tax liability would be reduced to zero.
A rebate, on the other hand, is a direct payment to the consumer, usually in the form of a check or a credit on a bill. Rebates are typically offered by manufacturers or retailers as an incentive to purchase a specific product or service. For example, a manufacturer may offer a $100 rebate to customers who purchase a qualifying energy-efficient HVAC system.
In summary, a tax credit is a reduction in the amount of taxes owed to the government, while a rebate is a direct payment to the consumer. They both can help reduce the cost of a purchase, but they work in different ways and are used in different situations.
How do I claim a tax credit?
The process for claiming a tax credit will vary depending on the type of credit and the specific circumstances. However, here are some general steps to claim a tax credit:
Determine eligibility: Before claiming a tax credit, it's important to determine whether you are eligible for the credit. Each credit has its own set of qualifications and criteria that must be met. Review the requirements of the credit and make sure that you qualify.
Gather documentation: The IRS will require documentation to verify that you are eligible for the credit and that the expenses you are claiming are valid. This may include receipts, invoices, or other forms of proof of purchase. In the case of the a tax credit for a new heat pump system, make sure to have the AHRI Certificate and number for the system you are installing, and check that the efficiency metrics meet the requirements for the tax credit.
File your taxes: To claim a tax credit, you will need to file your taxes. Tax credits are generally claimed on your annual tax return. Be sure to use the correct tax form for the credit you are claiming.
Fill out the appropriate forms: Depending on the credit, you may need to fill out additional forms or schedules. For example, to claim the tax credit for a new residential heat pump system, you would need to fill out Form 5695.
Submit your return: Once you have completed your tax return, including any forms or schedules related to the credit, you can submit it to the IRS. You can file your return electronically or by mail.
Wait for a response: After you have filed your return, the IRS will review it and determine whether you qualify for the credit. If you do, the credit will be applied to your taxes and will reduce the amount you owe or increase your refund.
It's important to note that tax laws and regulations can change over time, so it's always recommended to check the IRS website or consult with a tax professional to ensure that you have the most up-to-date information on the tax credit you're claiming, the qualifications that need to be met, and the forms and documentation required.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction. E-Den Home Electrification, Inc. makes no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the website or the information contained on the website. E-Den Home Electrification Inc. assumes no responsibility for any errors or omissions in the content of this website or such other materials or communications. You alone assume the sole responsibility of evaluating the merits and risks associated with the use of any information or other content on this website. We may amend, update or otherwise change, at any time and without notice, any or all of the contents and information contained on this website.