How to Get the 25C Heat Pump Tax Credit

The Energy Efficient Home Improvement Credit is a nonrefundable tax credit for homeowners who invest in specific energy-saving upgrades. Governed by Section 25C of the U.S. tax code, this incentive is designed to offset the expense of improving a home’s energy consumption. This credit covers a range of improvements, but this guide focuses on the portion for installing new electric or natural gas heat pumps. The credit directly reduces your total tax liability, making high-efficiency systems more financially accessible.

Homeowner and Home Eligibility Requirements

To qualify for the tax credit, the taxpayer must own the property where the heat pump is installed, which excludes renters. The credit is for improvements made to your principal residence, which is the home you live in for the majority of the year. Vacation homes, second homes, and properties you own but rent out to others do not qualify for this tax incentive.

The credit applies only to an “existing home,” which the IRS defines as a property that has been previously occupied and is not newly constructed. This distinction encourages energy-efficiency upgrades in the current housing stock. The installation of the qualifying heat pump must take place in this primary, existing residence.

Qualifying Heat Pump Specifications

For a heat pump to be eligible for the 25C credit, it must meet energy efficiency standards set by the Department of Energy. These standards are measured by performance ratings, with the key metrics being the Seasonal Energy Efficiency Ratio 2 (SEER2), the Energy Efficiency Ratio 2 (EER2), and the Heating Seasonal Performance Factor 2 (HSPF2). Higher numbers signify better performance and lower energy consumption.

The minimum required ratings can differ based on the climate region where the home is located. For instance, split-system heat pumps in northern states must have a SEER2 of 15.2 or higher, an EER2 of 10.0 or higher, and an HSPF2 of 8.1 or higher. In contrast, split-system heat pumps installed in southern states must meet a SEER2 of 15.2 or higher, an EER2 of 11.7 or higher, and an HSPF2 of 7.8 or higher. These regional standards ensure the equipment is optimized for the local climate’s heating and cooling demands.

Homeowners should not rely solely on a contractor’s assurance that a system qualifies. The most reliable method is to check the specific model against the certified product directories maintained by ENERGY STAR or the Consortium for Energy Efficiency (CEE). These online databases allow you to search for model numbers to verify they meet the technical specifications for the tax credit.

Calculating the Tax Credit Amount

The tax credit is 30% of the total project cost, which includes both the price of the qualifying heat pump unit and the expenses for professional installation labor. All related costs, from the equipment itself to the installer’s fees, contribute to the base amount used for determining the credit.

The credit is limited to a maximum of $2,000 per year for heat pumps. For example, if the total cost for a qualifying heat pump and its installation is $8,000, applying the 30% rate results in a potential credit of $2,400. However, due to the annual limit, the taxpayer can only claim a $2,000 credit for that year. If the total cost were $6,000, the credit would be $1,800, as this amount is below the cap.

This $2,000 limit for heat pumps is part of a broader annual cap of $3,200 for all Energy Efficient Home Improvement Credits combined. This means 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 in the same year, such as new windows or insulation. The credit is nonrefundable, meaning it can reduce your tax liability to zero, but you will not receive any portion of it back as a refund.

Required Documentation and Information

Homeowners must obtain and retain a Manufacturer’s Certification Statement for their records. This is a signed document from the manufacturer attesting that the specific product model meets the energy efficiency requirements for the 25C credit. While you do not submit this statement with your tax return, you must have it available in case the IRS requests it.

You will also need detailed receipts and invoices as proof of purchase and installation. These documents should clearly itemize the costs, separating the price of the heat pump unit from the installation labor fees. The invoice must show the date the equipment was placed in service, as the credit is claimed for the tax year in which the installation is completed.

The credit is claimed by completing and filing IRS Form 5695, Residential Energy Credits. For equipment placed in service starting in 2025, you must also provide the unit’s Product Identification Number (PIN). This requirement means the heat pump must come from a manufacturer registered with the IRS. You will enter the total costs for your qualifying heat pump and labor, along with the PIN, on the form to determine your credit.

How to Claim the Credit

After completing Form 5695, you must file it with your annual federal income tax return by attaching it to your Form 1040. Tax software programs can guide you through filling out Form 5695 and attaching it to your electronic submission. If filing by mail, you will include a printed copy of the completed form with your paper return.

The final credit value is transferred from Form 5695 to Schedule 3 (Additional Credits and Payments), which accompanies your Form 1040. This amount is then used to reduce the total tax you owe for the year.

Once your return is submitted, keep all related paperwork, including invoices and the Manufacturer’s Certification Statement, for at least three years. You will need these documents to substantiate your claim if the IRS selects your return for review.