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Inflation Reduction Act’s Energy Efficient Home Improvement Tax Credit (25C)
Making HVAC More Affordable
Thanks to the IRA, if you made or are planning to make certain qualified energy-efficient improvements to your home after January 1, 2023, you may qualify for a tax credit from the IRS.
For heat pump projects, the tax credit amount is 30% of the total project cost (includes equipment and installation), up to a $2,000 maximum.
So, if your project costs $1,000, you could claim 30% of that ($300). If your project is $10,000, you can claim a $2,000 tax credit.
Tax credits are applied to the tax year you install the heat pump. For example, if your heat pump is installed in 2023, you can redeem your credit when you submit your taxes in 2024 for the 2023 tax season.
This tax credit is a part of the Energy Efficient Home Improvement Credit. There is no lifetime dollar limit for this tax credit. You can claim the maximum annual credit each year that you make eligible improvements through the end of 2032. Other improvements that qualify include home energy audits and qualifying insulation projects.
If you have more questions about the IRA rebate, I have linked the IRS FAQ. If you need form 5695 to figure and take your residential energy credits, select the button corresponding button.
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How to Qualify for the Heat Pump Tax Credit
To qualify for the heat pump tax credit, you must install the unit in your primary residence—meaning the home where you live the majority of the time. Additionally, the home must be in the United States and be an existing property you’re upgrading, not a new construction.
Also, importantly, to qualify for the IRA tax credit, the specific heat pump or heat pump hot water heater model must meet the highest energy-efficiency requirements. Qualifying heat pumps include those that are electric or natural gas with a thermal efficiency rating of at least 75%.
Heat pumps may be either ducted or non-ducted (mini-splits), but eligibility also depends on whether you live in the North or the South.
If you live in the South, ducted heat pumps that have the ENERGY STAR label qualify.
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Ducted Split Systems: ENERGY STAR-certified heating equipment with HSPF ≥ 7.8, SEER2 ≥ 15.2, EER2 ≥ 11.7.
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Gas/Electric Packaged Systems: ENERGY STAR-certified packaged systems with SEER2 ≥ 15.2 and EER2 ≥ 11.5.
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Ductless Mini-Split Systems: ENERGY STAR-certified non-ducted mini splits with SEER2 ≥ 16, EER2 ≥ 12, HSPF2 ≥ 9.
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Heat Pumps with ENERGY STAR Cold Climate: Split and packaged models with SEER ≥ 15.2, EER2 ≥ 10, and HSPF2 ≥ 8.1. Mini-split systems with SEER2 ≥ 16, EER ≥ 9, and HSPF ≥ 9.5.
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What does THAT mean??
For those that would like to know what all of those acronyms mean - It's your lucky day!
SEER/SEER2 – Seasonal Energy Efficiency Ratio. Every HVAC system has a SEER rating. The higher the rating, the more energy-efficient your unit is.
HSPF/HSPF2 – Heating Seasonal Performance Factor. Heat pumps have an HSPF rating that indicates their heating efficiency. The HSPF rating standard stays the same, with a nationwide minimum SEER rating of 15. Split-system heating systems must have a minimum HSPF rating of 8.8 or 7.5 HSPF2.
EER/EER2 – Energy Efficiency Ratio for cooling systems. Air conditioners have an EER rating that is calculated in a nearly identical manner to SEER – BTU (British Thermal Unit) divided by WH (Watt-Hours). The primary difference is how units are tested to calculate their SEER and EER ratings. While SEER ratings consider the system’s performance when external temperatures range from 65°F to 104°F, EER ratings only test the system at a constant outdoor temperature of 95°F. The Southeastern United States is the only region in the country where the DOE requires both a minimum EER and SEER rating.
Although minimum energy-efficiency ratings are changing, the new requirements won’t impact you right away. If your current HVAC system doesn’t meet the new 2023 standards, you won’t be forced to upgrade your unit. However, replacing your current system sooner rather than later has many advantages, including significantly lower energy bills and environmental benefits.
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