How to Claim the IRS Heat Pump Tax Credit

The Inflation Reduction Act of 2022 expanded a federal program, now called the Energy Efficient Home Improvement Credit, providing an incentive for homeowners who install qualifying high-efficiency heat pumps. This program allows taxpayers to claim a credit, which is a dollar-for-dollar reduction of their income tax liability. The updated credit is available for improvements made from January 1, 2023, through the end of 2032.

Taxpayer and Property Eligibility Requirements

To qualify for the heat pump tax credit, you must make improvements to an existing home that you own and use as your principal residence. A principal residence is the home where you live most of the time and cannot be a property used solely for business or as a rental you do not live in. The property must be located in the United States.

The credit is not available for newly constructed homes. Both homeowners and, in some cases, renters who pay for the qualifying improvements can be eligible. If you use a portion of your home for business, the credit is prorated based on the percentage of the home used for personal purposes.

Qualified Heat Pump Technical Specifications

For a heat pump to be eligible for the tax credit, it must meet or exceed the highest efficiency tier established by the Consortium for Energy Efficiency (CEE), not including advanced tiers. These standards are updated periodically, so the unit must meet the CEE criteria in effect at the beginning of the year it is installed.

The performance metrics that determine a heat pump’s efficiency are SEER2 (Seasonal Energy Efficiency Ratio 2), EER2 (Energy Efficiency Ratio 2), and HSPF2 (Heating Seasonal Performance Factor 2). To ensure a specific model qualifies, homeowners should look for the ENERGY STAR label.

Calculating the Credit Amount

The credit is 30% of the total project cost, including the price of the heat pump and any labor costs for its installation. The credit for a qualifying heat pump is capped at $2,000 per year. This $2,000 limit is part of a larger overall annual cap of $3,200 for all combined Energy Efficient Home Improvement Credits. If you claim the full $2,000 for a heat pump, you can still claim up to $1,200 for other eligible improvements like windows or insulation in the same year.

If you receive a non-taxable rebate from a utility company or state energy program, you must subtract the rebate amount from your total costs before calculating the 30% credit. For instance, if a heat pump and installation cost $8,000 and you receive a $500 utility rebate, your basis for the credit becomes $7,500. The tax credit would be 30% of $7,500, which is $2,250, but it would be limited to the $2,000 maximum.

Information and Forms Needed to Claim the Credit

To claim the heat pump tax credit, you must gather specific documentation. You will need to retain detailed, itemized receipts that separate the costs of the equipment from installation labor. You must also have the Manufacturer’s Certification Statement for your specific heat pump model, which confirms it meets the required efficiency standards. Beginning in 2025, you will also need a product identification number from the manufacturer to claim the credit.

The document for claiming the credit is IRS Form 5695, Residential Energy Credits. You will enter the costs for your qualified heat pump and its installation on this form.

Filing for the Credit with Your Tax Return

After gathering your documentation and completing Form 5695, you must file it with your annual tax return. The completed Form 5695 must be attached to your Form 1040, U.S. Individual Income Tax Return. Tax software programs will prompt you for the relevant information and attach the form to your electronic submission. If filing by mail, you will physically attach the printed Form 5695 behind your Form 1040. The total credit from Form 5695 is then carried over to your Form 1040, reducing your overall tax liability.