Air Source Heat Pumps Tax Credit | ENERGY STAR

What Products are Eligible?

Starting January 1, , air source heat pumps that are recognized as ENERGY STAR Most Efficient are eligible for this credit. There are two pathways for eligibility. One pathway is designed for heating-dominated applications (i.e., cold climates), and the relevant eligible products will be designated as ENERGY STAR Cold Climate. The other path is for cooling-dominated and dual-fuel applications (e.g., a heat pump paired with a furnace). Consumers and contractors can choose either pathway regardless of the home’s location, as there is no longer a regional requirement.

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Your contractor can use ENERGY STAR’s listing of eligible heat pumps, which includes both central heat pumps and ductless heat pumps, to determine whether the products you are considering meet the tax credit requirements.

Note: Under the tax code, eligible equipment must “meet or exceed the highest efficiency tier (not including any advanced tier) established by the Consortium for Energy Efficiency which is in effect as of the beginning of the calendar year.”  The eligibility described above is consistent with this requirement.

See Definitions.

Annual Limits on Energy Efficient Home Improvement Tax Credits

In addition to limits on the amount of credit you can claim for any particular equipment installation or home improvement, there are annual aggregate limits.  The overall total limit for an efficiency tax credit in one year is $3,200.  This breaks down to a total limit of $1,200 for any combination of home envelope improvements (windows/doors/skylights, insulation, electrical) plus furnaces, boilers and central air conditioners.  Any combination of heat pumps, heat pump water heaters and biomass stoves/boilers are subject to an annual total limit of $2,000. (Note: ENERGY STAR certified geothermal heat pumps are eligible for a separate tax credit and not counted against these limits.)

Note: The information provided here about Air-Source heat pumps that are eligible for the tax credit is the most current available. Currently, eligible equipment must “meet or exceed the highest efficiency tier (not including any advanced tier) established by the Consortium for Energy Efficiency which is in effect as of the beginning of the calendar year.”  The eligibility requirements are subject to change based on the final CEE Criteria and the Internal Revenue Service (IRS).

Who can use this credit?

For the Energy Efficient Home Improvement Credit, the following requirements apply:

• exterior doors, windows and skylights, insulation materials or systems, and air sealing materials or systems: the home must be located in the United States and must be owned and used by the taxpayer as the taxpayer's principal residence (does not include renters, nor does it include second homes);
• central air conditioners; natural gas, propane, or oil water heaters; natural gas, propane or oil furnaces or hot water boilers; electric or natural gas heat pumps; electric or natural gas heat pump water heaters; biomass stoves or biomass boilers; and improvements to panelboards, sub-panelboards, branch circuits, or feeders: the home must be located in the United States and used as a residence, including a second home, by the taxpayer (includes renters who make eligible improvements); and
• home energy audits: the home must be located in the United States and owned or used by the taxpayer as the taxpayer's principal residence (does not include second home) and (includes renters who make eligible improvements).

The credits are available only for certain improvements made to second homes, and the credits are never available when the improvements are made to homes not used as a residence by the taxpayer. For example, landlords can never use these credits for improvements made to any homes they rent out but do not use as a residence themselves. However, if a taxpayer is renting a home as their principal residence and makes eligible improvements, a tax credit may be available to such tenant.

A principal residence is the home where you live most of the time. The home must be in the United States. It can include a house, houseboat, mobile home, cooperative apartment, condominium, and a manufactured home.

How can I maximize my tax credits?

Given the way the annual aggregate limits are structured, it may be prudent to spread your improvements over a few years.   If your heating or cooling system is old, and you are considering a new air source heat pump, it is always wise to optimize your attic insulation first, so you don’t pay for more heating and cooling than you actually need.  Making these upgrades together in one year would allow you a tax credit of up to $1,200 for the insulation and up to $2,000 for the heat pump. Similarly, you could combine a heat pump installation with window/door replacements.  In that scenario, the $2,000 credit for the heat pump could be combined with tax credits up to $600 total for the windows/skylights plus $500 for two or more doors. If you replace your water heater the following year, you would be eligible for another 30% tax credit, up to $2,000 plus up to $600 if you need an electric panel upgrade to accommodate the new water heater.

Heat pumps are increasing in popularity; as of ,over 17 million housing units had them installed. Because they provide cooling in the summer as well as heating in winter, heat pumps are helpful year-round. Now, they already account for more than half of all residential heating equipment sales across the United States. Today we’re going to break down how they work, why Americans are upgrading to them, and how they can help save you money — via tax credits and rebates!

Heat pumps are an energy-efficient alternative to furnaces and air conditioners. Like your refrigerator, heat pumps use electricity to transfer heat from a cool space to a warm space. During cold seasons, heat pumps move heat from the cool outdoors into your warm home. During warmer seasons, they move heat from your home into the outdoors. Because heat pumps transfer — rather than generate — heat, they are significantly more efficient than traditional heating systems.

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There are two main types of heat pumps connected by ducts: air-source and geothermal, which differ in where they collect heat from (air, water, or the ground outside your home) and concentrate it for use inside.

The most common type of heat pump is the air-source heat pump, which transfers heat between your home and the outside air. Modern air-source heat pumps can reduce your electricity use by 50% compared to furnaces and baseboard heaters. Until recently, they haven’t been used in areas that experience subfreezing temperatures for extended periods of time; now, they're a legitimate option for colder regions due to advancements in air-source heat pump technology.

Air-source heat pumps are also now available for homes without ducts, using a ductless version called a mini-split heat pump. Another kind of air-source heat pump is called a “reverse cycle chiller,” generating hot and cold water instead of air and compatible with radiant floor heating systems in heating mode.

Geothermal (ground-source or water-source) heat pumps transfer heat between your house and the ground or a nearby water source. They cost more to install but have low operating costs because they take advantage of relatively constant ground or water temperatures.

Sturdy and reliable, geothermal heat pumps can reduce energy use by 30%-60%, control humidity, and fit in a wide variety of homes. Compared to other types of heat pumps, they can also be used in more extreme climates.

You can learn more about the different kinds of heat pump systems — and which one might be best for you — at our Energy Saver site.

Heat pumps use electricity to transfer — rather than create — heat, making them much more efficient than traditional HVAC systems. Depending what heating equipment you’re upgrading from, you could save up to7.6 tons of carbon emissions per year. With millions of households choosing a heat pump each year, those tons add up to a meaningful impact for our climate. Show your appreciation to our Earth by choosing the clean energy option!

Less energy usage = lower utility bills. Depending on the size of your home, local climate, and how energy efficient your home is, savings can average over$500 per year. Pairing weatherization measures such as insulation with a heat pump can help you save even more – you can learn about incentives for insulation and other technologies in our Energy Savings Hub. When you’re shopping around for a heat pump, make sure to reference EnergyStar.gov for government-certified products to maximize your energy savings.

Through President Biden’s Investing in America Plan, homeowners are now eligible for tax credits when they install an air-source or geothermal heat pump: up to 30% federal tax credit on the total cost of buying and installing a heat pump. Soon, states will be able to provide residents with additional rebates to save money off the cost of heat pumps — with low-income residents eligible for particularly high savings.

Upgrading to clean technology without first ensuring that your home is properly weatherized, or protected against energy loss, can undercut your efforts and eat into your potential savings. A home energy audit will give you a personalized roadmap, tailored to your home and environment, that will help you get the most bang for your buck.

Through President Biden’s Investing in America plan, you may be eligible for a 30% tax credit (up to $150) on your professional home energy audit. To claim this credit, simply submit IRS Form when filing your - taxes.

Learn more ways to save money while also saving the planet at our Energy Savings Hub, and check out our blog post addressing misinformation on DOE appliance standards.

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