Is Your New Heat Pump Tax Deductible?
Learn how a new energy-efficient heat pump can reduce your tax liability through a federal credit. We explain the process from unit eligibility to filing.
When considering a new heat pump, many homeowners wonder about potential tax savings. The primary federal tax benefit available is a credit, not a deduction. This distinction is important, as a tax credit provides a dollar-for-dollar reduction of the taxes you owe, while a deduction only lowers your taxable income.
This benefit is part of a broader government initiative to encourage energy-efficient home upgrades. Understanding the specific rules for your property and the equipment is the first step to determining if you can take advantage of this incentive. The program is available for several years, allowing homeowners to plan for these improvements.
Heat Pump and Property Eligibility Rules
Eligibility for a heat pump tax credit depends on the type of heat pump installed, as two different federal credits are available. The Energy Efficient Home Improvement Credit applies to standard air-source heat pumps, while the Residential Clean Energy Credit is for geothermal systems. For the Energy Efficient Home Improvement Credit, the property must be an existing home in the United States that you own and use as your principal residence. New construction projects, rentals, and second homes are not eligible. The rules for the Residential Clean Energy Credit, which covers geothermal heat pumps, are more flexible, applying to existing homes, new construction, and second homes.
The heat pump equipment itself is subject to energy efficiency standards. To be eligible, the system must meet or exceed the highest efficiency tier established by the Consortium for Energy Efficiency (CEE), not including any advanced tiers. These standards are measured by ratings like SEER2, EER2, and HSPF2, which assess the unit’s performance in cooling and heating.
Because these standards can change, the heat pump must meet the CEE requirements that are in effect at the beginning of the year it is installed. Homeowners should look for an ENERGY STAR label, but must also confirm the specific efficiency ratings with their installer or by checking the manufacturer’s product information. For split systems, the entire system must meet the CEE requirements to qualify.
Calculating Your Potential Tax Credit
The financial benefit for the Energy Efficient Home Improvement Credit is 30% of the total project cost, which includes the price of the heat pump unit and any associated installation or labor expenses. This credit is capped at $2,000 per year for a qualifying heat pump installation. For example, if the total cost of your new heat pump and its installation was $8,000, you would calculate 30% of that amount, which is $2,400. Since this exceeds the cap, your credit would be limited to the $2,000 maximum.
The $2,000 limit for heat pumps is part of a larger, overall annual cap for the Energy Efficient Home Improvement Credit of $3,200. If you claimed the full $2,000 credit for a heat pump, you would still have the capacity to claim up to an additional $1,200 for other qualifying expenses in the same tax year. These could include improvements like new energy-efficient windows, doors, or insulation. The credit has no lifetime limit, meaning you can claim it in subsequent years for new projects.
Claiming the Energy Efficient Home Improvement Credit
Before you can file for the credit, you must gather specific documentation. You will need itemized receipts from the installation that clearly separate the cost of the heat pump equipment from the installation labor. You will also need a Manufacturer’s Certification Statement, which is a signed document from the manufacturer attesting that your heat pump model qualifies under the CEE standards. This statement can be found on the manufacturer’s or the ENERGY STAR website and should be retained for your records.
For equipment installed in 2025, you will need to report the manufacturer’s four-digit Qualified Manufacturer (QM) code for the heat pump’s outdoor unit on your tax return. With your documents prepared, you can claim the credit when you file your annual income taxes using IRS Form 5695, Residential Energy Credits. The information for your heat pump is entered in Part II of this form. The final credit amount is then transferred to Schedule 3 (Form 1040). This credit can reduce your tax liability to zero, but you cannot get back more than you owe in taxes, and any excess credit cannot be carried forward to future years.