How to Claim the Heat Pump Installation Tax Credit

The Energy Efficient Home Improvement Credit is a federal tax incentive designed to encourage homeowners to install high-efficiency equipment, including qualifying heat pumps. This credit was significantly expanded by the Inflation Reduction Act of 2022, increasing the financial benefits for those who invest in eligible energy-saving upgrades. The credit directly reduces a taxpayer’s total tax liability and is available for improvements made annually through 2032.

Taxpayer and Property Eligibility

To qualify for the credit, the property where the heat pump is installed must be your principal residence. A principal residence is the main home you live in for most of the year. It can be a:

• House
• Houseboat
• Mobile home
• Cooperative apartment
• Condominium

Renters may also be eligible if they purchase and install a qualifying heat pump in their principal residence.

This tax incentive is for improvements made to an existing home that you currently occupy. The rules do not permit the credit to be claimed for equipment installed in a home that is newly constructed. The use of the property is a determining factor, as the credit is intended for personal residential use. If you use part of your home for business, the credit calculation may be affected. For a property used exclusively for business, such as a full-time rental property you do not live in, the credit cannot be claimed.

Qualified Heat Pump Requirements

Not every heat pump on the market will qualify for this tax credit. The equipment must meet specific technical energy efficiency standards set by the Consortium for Energy Efficiency (CEE). Homeowners should confirm their chosen model meets these requirements before purchase and installation.

The performance of a heat pump is measured by several metrics, and the equipment must meet or exceed the CEE’s highest efficiency tier (not including any advanced tiers) to qualify. SEER2 (Seasonal Energy Efficiency Ratio 2) measures cooling efficiency, while EER2 (Energy Efficiency Ratio 2) measures efficiency at peak outdoor temperatures. HSPF2 (Heating Seasonal Performance Factor 2) evaluates the unit’s heating efficiency over an entire season.

To verify that a specific heat pump model is eligible, you can check the ENERGY STAR website, which lists qualifying products. A more direct method is to obtain a Manufacturer’s Certification Statement from the equipment’s manufacturer. Beginning in 2025, you will also need a Product Identification Number to claim the credit, and the equipment must be produced by a qualified manufacturer.

Calculating the Credit Amount

The credit is calculated as 30% of the total project cost, which includes the price of the heat pump unit and professional installation labor. The credit applies to qualifying equipment placed in service on or after January 1, 2023.

There is a specific annual limit for heat pump installations. The maximum credit you can claim for a qualified heat pump or heat pump water heater is $2,000 per year. This means that even if 30% of your project cost exceeds this amount, your credit for the heat pump portion is capped at $2,000.

This $2,000 cap is part of a larger, overall annual limit for the Energy Efficient Home Improvement Credit. The total credit for all eligible improvements in a single year cannot exceed $3,200. For example, if you claim the full $2,000 for a heat pump, you could still claim up to an additional $1,200 for other qualifying expenses like new windows, doors, or a home energy audit in the same year.

This is a nonrefundable tax credit. It can reduce your income tax liability to zero, but you will not receive any portion back as a cash refund if the credit is greater than your tax liability. Any excess amount cannot be carried forward to apply to future tax years.

How to Claim the Credit

Before you can claim the credit, you must gather specific documents. You will need the itemized invoices from your contractor that clearly separate the cost of the heat pump equipment from the installation labor. You must also have the Manufacturer’s Certification Statement for your specific heat pump model. This is a signed statement from the manufacturer confirming that the product meets the required energy efficiency standards and should be kept with your tax records.

The credit is calculated and reported on IRS Form 5695, Residential Energy Credits. You will complete Part II of the form, entering the costs for the equipment and installation labor to figure the total credit amount. You can download the form and its instructions from the IRS website.

Once you have completed Form 5695, you must file it with your annual federal tax return, Form 1040. If you use tax preparation software to e-file, the program will guide you to enter the necessary information. For those who file a paper return, you must physically attach the completed copy of Form 5695 to your Form 1040.