2022 Inflation Reduction Act Heat Pump Tax Credits

If you’ve been thinking about making energy-saving home improvements, now is a great time, thanks to tax incentives in the Inflation Reduction Act of 2022 (IRA). Here in Iowa, there are tax breaks at both the Federal and state levels for home energy upgrades. The biggest Inflation Reduction Act HVAC tax credits & rebates are for heat pumps installed in residential properties.

If you’d like to take advantage of these incentives, trust the experts at Aspen Aire Heating & Cooling to install a qualifying heat pump in your home.

The information provided here is intended for general information only. Consult your tax advisor for details and guidance on your specific tax situation.

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Inflation Reduction Act Heat Pump Tax Credits

President Joe Biden passed the Inflation Reduction Act into law on August 16, 2022. It allows homeowners to take advantage of tax credits and rebates for making energy efficiency upgrades to equipment such as hot water heaters and central heating and cooling equipment. The largest benefit is for installing a heat pump in a home.

What Is a Heat Pump?

Geothermal Heat Pump DiagramA heat pump is a high-efficiency heating and cooling system that replaces both a furnace and an air conditioner. Rather than heating or cooling the air in a home, they transfer or “pump” heat between the inside and the outside of the building.

A standard, or air source, heat pump transfers heat to and from the air outside. A geothermal heat pump, on the other hand, transfers heat into and out of the ground, below the frost line where the temperature is consistent. As a result, heat pumps use far less electricity than air conditioners and they don’t need natural gas for heating.

Why the Focus on Heat Pumps?

Because a heat pump relies on clean energy sources like air from the ground or outside the home, it’s an attractive option for lowering utility bills. With a heat pump, you can help protect the environment by reducing greenhouse gas emissions while saving money on your heating and cooling costs.

Despite these benefits, homeowners often overlook heat pumps when they need a new HVAC system, likely because they’re typically considered expensive to install. While it is true that a heat pump costs more in colder climates like we have here in the Des Moines area, these new tax incentives could make them more affordable than ever. In fact, low-income homeowners could qualify for a free heat pump.

What New Heat Pump Tax Deductions are Available in 2023?

The Inflation Reduction Act of 2022 expanded two tax credits for homeowners who invest in clean energy and energy efficiency improvements for their homes.

Changes to the 25C Tax Credit

The Residential Energy Tax Credit (Section 25D Tax Credit) provides a 30% tax credit for qualifying geothermal or heat pump purchases & installation, among other energy-efficiency home upgrades. The credit amount will drop from 2032 to 2034, after which it will expire. Consult your tax advisor for details on your eligibility for this credit.

Tax Credits for Additional Costs Related to Heat Pump Installation

If your heat pump installation requires some additional work, there’s a tax credit available for that, too. The Energy Efficient Home Improvement Credit (Section 25C Tax Credit), which expired in 2021, was reintroduced and benefits were expanded beginning in 2023. As a result, homeowners are eligible for a tax credit of 30% of the cost of qualifying energy efficiency improvements. Your tax advisor can advise you on whether you qualify.

Through December 31, 2032, you can claim up to $1,200 on energy efficiency upgrades including:

  • $600 if your heat pump installation requires you to upgrade your home’s electrical supply
  • $600 for air-sealing your home to improve its energy efficiency
  • $150 for a home energy audit to find ways to save energy around the house

Inflation Reduction Act Heat Pump Retroactive Tax Credit

If you were hoping to claim a heat pump tax credit for 2022 vs 2023, there is a $300 tax credit available for heat pumps installed in 2022, as long as they meet the top CEE efficiency tier.

Who Qualifies for a Heat Pump Tax Credit?

  • All taxpayers qualify for the federal heat pump tax credits
  • There are no heat pump tax credit 2023 income limits
  • Equipment must be installed beginning January 1, 2023 or after

What SEER Heat Pumps Qualify for an Energy Tax Credit in 2023?

Heat pumps must meet the Consortium for Energy Efficiency’s (CEE) highest tier to qualify for the 25C tax credit. For your convenience, Energy Star has a database of tax credits and rebates and qualifying geothermal heat pump models. Simply enter your zip code to find the programs and products for your area.

How to Claim an Inflation Reduction Act Heat Pump Tax Credit

You claim the heat pump tax credit for the Inflation Reduction Act on your federal income tax return. Other energy efficiency tax credits for residential properties have been claimed using IRS Form 5695. Your tax preparer or an online tax program should be able to help you complete the correct form.

Inflation Reduction Act State-Level Heat Pump Rebates

The Inflation Reduction Act of 2022 also established grants that states could use to create rebate programs for energy-efficiency upgrade expenses. These are expected to be available in late 2023. Although the IRA doesn’t prevent taxpayers from claiming a tax credit in addition to a rebate for the same project, keep in mind that the rebate will lower the amount of your out-of-pocket costs. That means you’ll have fewer expenses for which the tax credit can be claimed.

High-Efficiency Electric Home Rebate Act (HEEHRA)

The High-Efficiency Electric Home Rebate Act (HEEHRA) provides a direct rebate to low- or moderate-income households for installing qualifying heat pump models. Homeowners can receive up to $14,000 off the cost of their heat pump installation and purchase.

Rebates for Upgrades Related to Heat Pump Installation

Rebates may be available at the state level for low- or moderate-income households to help with the costs of upgrading your home’s efficiency or electrical system as part of your heat pump installation. Qualification is determined by each state based on its median household income. The rebates include:

  • $2,500 for electrical wiring
  • $4,000 for upgrading your electrical panel and electrical service
  • $1,600 for air sealing, insulation and ventilation improvements

Inflation Reduction Act Heat Pump Rebate Income Limits

You must meet certain income requirements to qualify for 2023 heat pump rebate programs. These limits are based on your household income compared with your state’s median income:

  • Income less than 80% of the median income = 100% of available rebates
  • Income between 80% and 150% of the median income = 50% of eligible rebates for
  • Income over 150% of median income = not eligible for rebates

What SEER Heat Pumps Qualify for a Rebate in 2023?

To qualify for the HEEHRA program, heat pump equipment must have at least the ENERGY STAR® 6.1 specification. Households must also be below the income limits.

How to Claim an Inflation Reduction Act Heat Pump Rebate

The discount is subtracted from the purchase price, meaning you simply pay less out of pocket. This is good news for consumers, because there’s no need to wait until tax time to take advantage of this benefit. For low-income households that qualify for the maximum rebate, this could result in a free heat pump.

Access to state rebate programs varies, but you can expect to complete some type of reimbursement form with an itemized receipt attached. Aspen Aire customers here in Iowa will be provided with a receipt for their heat pump installation.

State of Iowa Geothermal Heat Pump Tax Credit

Iowa residents can also get a heat pump tax break at the state level. According to the Iowa Department of Revenue, taxpayers can apply for the Geothermal Heat Pump Tax Credit on a first-come, first-served basis. The credit is available for geothermal heat pumps installed on residential properties in Iowa between January 1, 2019, and January 1, 2024. The rebate is equal to 20% of the Residential Energy Efficiency Tax Credit (IRC Section 25D).

How to Apply

You can apply for the Iowa Geothermal Heat Pump Tax Credit at GovConnectIowa. Applications must be submitted by May 1 the year following installation. A waitlist will be established once the program awards the maximum amount of tax credits.

Iowa Geothermal Property Tax Exemption

If you’ve completed geothermal heat pump installation on your residential property in Iowa after July 1, 2012, you may be eligible for a property tax exemption. It is applied to the value added to your home by installing a new or retrofit geothermal heating or cooling system. The exemption will be applicable for 10 years without having to refile.

How to Apply

You don’t have to apply the first year you add the geothermal system, but the exemption request must be filed by Feb. 1 of the first year you’re claiming the exemption. Review the Iowa Department of Revenue’s list of tax credits and exemptions for details and an application form.

Additional Heat Pump Savings for Des Moines-Area Residents

If you’re a MidAmerican Energy Company Customer in the Des Moines area, you may be eligible for instant discounts and rebates on energy-efficient residential HVAC equipment like air conditioners, gas furnaces, smart thermostats and heat pumps. Aspen Aire is a qualified dealer and installer for the MidAmerican Energy Discount and Rebate programs. See details and qualifying products at https://www.midamericanenergy.com/ia-residential-rebates.

Request a Quote for Geothermal Heat Pump Installation in the Des Moines Area

Ready to lower your energy bills while helping the environment? Call Aspen Aire Heating & Cooling at 515-257-8370 for expert geothermal heat pump installation in Des Moines, Ankeny and central Iowa. Financing options available!