Heat pump tax credit explained

Get a federal heat pump tax credit and save almost one-third of your entire bill.

heat pump tax credits1If you’ve been thinking about upgrading your home’s central air conditioning, replacing an old system, or even putting central cooling and heating in for the first time, you may want to give serious consideration to the efficiencies of a heat pump. If you live in the right climate, a heat pump can be an extremely cost-effective solution to your home’s combined cooling and heating needs. It can be even more cost-effective if you take advantage of an ongoing program made available through the federal government to offer tax credits to households employing any of a number of energy-saving systems, including an efficient geothermal heat pump.

Don't miss out on the heat pump tax credit! Get free quotes on Energy Star heat pumps and installation today!

Residential Renewable Energy Tax Credit, some basic information

Established by The Energy Policy Act of 2005, the federal tax credit for residential energy upgrades initially applied only to solar-electric systems, solar water heating systems and fuel cells. The Energy Improvement and Extension Act of 2008 extended the tax credit to small wind-energy systems and geothermal heat pumps, effective January 1, 2008. In addition to adding wind energy and geothermal heat pumps, the Extension Act included an eight-year extension of the credit through to December 31, 2016 and it eliminated the $2,000 credit limit for solar-electric systems (beginning in 2009.) The credit was further enhanced in February 2009 by the passage of The American Recovery and Reinvestment Act of 2009, which removed the maximum credit amount for all eligible technologies (except fuel cells) placed in service after 2008.

Thanks to the credits established and extended by the various Congressional acts, a taxpayer may claim a credit of up to 30 percent of qualified expenditures for a system that serves a dwelling unit located in the United States that is owned and used as a residence by the taxpayer. (If the installation is at a new home, the "placed in service" date is the date of occupancy by the homeowner.) Expenditures can include labor costs for on-site preparation, assembly or original system installation. The credit also allows for labor expenditures related to any piping or wiring necessary to interconnect a system to the home. If the federal tax credit exceeds your tax liabilities for a given year, the excess amount may be carried forward to the succeeding taxable year. The excess credit may be carried forward until 2016. (It is currently unclear whether the unused tax credit can be carried forward after the 2016 tax year.) The U.S. government is currently offering a tax credit for purchases made now through Dec. 31, 2016.

Heat pump eligibility basics

heat pump  tax credit1One thing to be clear of when considering the pursuit of a federal energy tax credit in the purchase of a residential heat pump is that only the geothermal type is eligible. There are two, mayor types of heat pumps:

  • Geothermal heat pumps – these units rely on the relatively constant temperature of the earth to draw warmer air in the cooler months and cooler air in the warmer months. These types of heat pumps can prove to be less efficient in regions where severe weather swings occur or where it gets cold enough for the earth to freeze.
  • Air-source heat pumps – are units that rely on a separate source to generate heat or coolant to produce the desired air flow (usually a gas or electric fired coolant system.)

Heat pumps are evaluated and graded on two efficiency scales: one for heating and one for cooling. The heating scale used to measure a heat pump is referred to as the Heating Seasonal Performance Factor (HSPF) and heat pumps that deliver HSPF rating between 8.5 and 10 are among the most efficient. The cooling scale used to grade heat pumps is similar to the one used for air conditioners, the Season Energy Efficiency Ratio (SEER) rating. The federal government requires that any air conditioning unit currently sold in the U.S. deliver a SEER rating of at least 13 and for any unit, the higher the SEER rating, the more efficient and cost-effective it will be.

Further, there are some specific eligibility requirements for geothermal heat pumps if you’re hoping to take full advantage of the federal energy tax credit:

  • There is no maximum credit for systems placed in service after 2008.
  • Systems must be placed in service on or after January 1, 2008, and on or before December 31, 2016.
  • The geothermal heat pump must meet federal Energy Star criteria.
  • The home served by the system does not have to be the taxpayer’s principal residence.

(Both packaged systems and split systems can qualify, provided they meet the other stipulations of the program.)

Energy Star status

heat pump tax credit2The federal Environmental Protection Agency (EPA) established the Energy Star program in 1992, under the authority of the Clean Air Act. The Act called for EPA to “conduct a basic engineering research and technology program to develop, evaluate, and demonstrate non–regulatory strategies and technologies for reducing air pollution." In 2005, Congress enacted the Energy Policy Act, which codified what would eventually be known as the Energy Star program. It’s a voluntary program designed to identify and promote energy–efficient products and buildings in order to reduce energy consumption, improve energy security. EPA sets standards for a wide variety of products and manufacturers voluntarily submit to having products and services evaluated against those standards. Products and services meeting or exceeding those standards can carry the Energy Star label, a distinction that provides promotion of products and buildings that meet the highest energy efficiency standards set by EPA.

To give you some example of how Energy Star standards can distinguish a product, let’s take the example of the geothermal heat pump. The federal government already sets a minimum required performance standard for any new air conditioning system installed for a residence. All new residential air conditioners sold in the U.S. must meet a minimum SEER rating of 13. In order for a geothermal heat pump to carry an Energy Star label, it must meet a minimum SEER rating of 14.1.

Tax credit or tax deduction?

While more and more people understand what this difference is, it can still be confusing. Is it better to get a federal tax credit or a federal tax deduction?

A tax credit is a dollar-for-dollar benefit. The credit is applied directly against your final tax bill, meaning you either get a larger refund or you get a nice reduction in what you owe for the year in federal taxes. A tax deduction is weighed against what you earn in a year and essentially reduces the taxable income upon which your final federal tax bill is figured. Less income usually means a smaller tax bill but not always. Even substantial deductions can keep you in the same general tax bracket. With negligible impact on what your final tax bill will be.

heat pump tax credits4In the case of a federal tax credit for a geothermal heat pump, you may also enjoy the added benefit of carrying some of that credit over. Let’s say you purchase an eligible geothermal heat pump for your home and it costs $8,000 to purchase and your contractor’s installation fees amount to $4,000. You may claim up to a $3,600 tax credit for this package of pump and installation. Now let’s say you made a small withholding miscalculation and you have a federal tax bill totaling $1,200. You can offset the entire tax bill for the year and still reserve $2,400 in applicable federal credits in case you have to offset taxes in future years.

Extra bang for your buck

Geothermal heat pumps have arguably the most efficient technology of any heating and home cooling system on the market. These systems use the Earth's natural heat and geothermal energy to both heat and cool the home. Some heat pumps with geothermal technology can be used to heat the water used in your home.

An Energy Star-qualified heat pump with geothermal technology is up to 45 percent more efficient than a standard heat pump.

Check this guide out for reviews of great heat pumps.

It's important to note that unlike previous energy credits, this heat pump tax credit applies to both main residences and second or vacation homes as well. Heat pumps purchased for rental properties or investment properties don't qualify for this credit.

Under this program, heat pumps installed in a houseboat, cooperative apartment, mobile home or condo don't qualify for the heat pump tax credit either.


But that shouldn’t deter you. Take some time and research whether you live in a climate zone where a heat pump will make sense. If so, take a deeper look into whether a geothermal heat pump is right for your home. If it is, you still have plenty of time to take advantage of a federal energy tax credit that can offset up to 30 percent of your total cost for purchasing and installing the system. Reply! can be a great asset to you in this endeavor as we can connect you with local HVAC professionals familiar with the intricacies of a geothermal heat pump as well as how to go about applying for that tax credit.

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