How Does the Heat Pump Replacement Tax Credit Work?
A federal tax credit can make a new heat pump more affordable. This guide clarifies the rules and paperwork involved in securing this home energy incentive.
The Inflation Reduction Act of 2022 expanded a federal tax incentive, now called the Energy Efficient Home Improvement Credit, for homeowners who invest in energy-saving upgrades. A focus of this credit is encouraging the adoption of high-efficiency heat pumps, which provide both heating and cooling. This tax credit directly reduces a homeowner’s tax liability, making the initial cost of purchasing and installing a new, qualifying heat pump system more manageable.
Eligibility Requirements for the Credit
The credit is available for improvements made to a taxpayer’s main home. This applies to existing homes and is not available for newly constructed properties. While homeowners are the primary beneficiaries, renters may also be eligible if they make qualifying improvements to their principal residence. Landlords are not eligible for this credit.
For air source heat pumps, eligibility is tied to the performance tiers established by the Consortium for Energy Efficiency (CEE). To qualify, a heat pump system must meet the specific criteria for SEER2, EER2, and HSPF2 as defined by the highest non-advanced efficiency tier set by the CEE for the year of installation. These standards are updated periodically, and equipment must meet the requirements in effect at the time of installation.
Calculating the Credit Amount
The credit is calculated as 30% of the total project cost, which includes both the price of the heat pump unit and any associated labor or installation fees. The maximum credit for a qualifying air source heat pump is $2,000 per year. This limit is applied annually, meaning a homeowner could potentially claim the credit again in a future year for a different qualifying improvement.
Geothermal heat pump systems do not qualify for this credit. They are instead eligible for the separate Residential Clean Energy Credit, which has its own set of rules and requirements.
The $2,000 limit is part of a larger overall annual cap for the Energy Efficient Home Improvement Credit. A taxpayer can claim a total of $3,200 in credits per year for all eligible improvements combined. This includes a separate $1,200 annual limit for other upgrades like windows, doors, and insulation. Therefore, a homeowner who installs a qualifying heat pump and also replaces windows could claim up to $2,000 for the heat pump and up to $1,200 for the other improvements in the same tax year.
Required Information and Documentation
Homeowners must obtain a Manufacturer’s Certification Statement. This is a signed document from the product manufacturer attesting that the specific heat pump model meets the technical requirements for the tax credit. Homeowners should obtain this statement, often available on the manufacturer’s website, and keep it with their tax records.
In addition to the certification, detailed proof of purchase and installation is necessary. This includes invoices and receipts that clearly itemize the costs. The documentation should show the price of the heat pump unit separate from the labor and installation charges, the date the equipment was placed in service, and the address of the home where the installation occurred.
Starting with equipment installed in 2025, taxpayers will need to include the manufacturer’s Qualified Manufacturer (QM) code on their tax return. In future years, a specific Product Identification Number (PIN) for each item is expected to be required.
How to Claim the Credit on Your Tax Return
Once eligibility is confirmed and all necessary documents are collected, the credit is claimed using IRS Form 5695, Residential Energy Credits. This form is filed along with the standard Form 1040 federal income tax return.
On Form 5695, the costs for the heat pump and its installation are entered in Part II, which is designated for the Energy Efficient Home Improvement Credit. The form guides the taxpayer to input the total qualified expenses.
After calculating the final credit amount on Form 5695, the result is transferred to Schedule 3 (Form 1040), Additional Credits and Payments. The credit is nonrefundable, which means it can reduce a taxpayer’s tax bill to zero, but no portion of the credit will be paid out as a refund beyond that amount.