In an effort to address the effects of climate change and help slow down global warming, the Inflation Reduction Act was signed into law this August. Part of this legislation is heat pump tax rebates — up to $2000 — for Americans who install a heat pump that meets the required standards.
Let’s take a look at this geothermal tax credit and how the Inflation Reduction Act heat pump provision is impacting the market.
Energy Efficient Home Improvement Credit
One of the tax credits that homeowners may already be aware of is the Nonbusiness Energy Property Credit. While this credit expired at the end of 2021, the Inflation Reduction Act revitalized this credit under a new name – the Energy Efficient Home Improvement Credit.
Per this new credit, homeowners can cut their tax bill even more if they install new energy-efficient appliances and features such as windows, doors, water heaters, furnaces and air conditioners. There are also new tax breaks for the purchase of electric vehicles, as well as the ability for low- and moderate-income families to qualify for rebates with the purchase of energy-efficient appliances.
What New – And What’s Not
The old credit was worth 10% of the costs of installing certain energy-efficient insulation, windows, doors, roofing and similar energy-saving improvements in homes. You were also eligible to claim the credit for 100% of the costs associated with installing certain energy-efficient water heaters, heat pumps, central air conditioning systems, furnaces, hot water boilers and air circulating fans.
Important stipulations for the credit included:
- A lifetime limit of $500 for the credit (credits taken in previous years counted towards the overall limit).
- A $200 lifetime limit for new windows.
- Individual credit limits for air circulating fans ($50); some furnaces and boilers ($150); and certain water heaters, heat pumps, and air conditioning systems ($300).
For the 2022 tax year, these old rules still apply. However, starting in 2023, the credit will be equal to 30% of the costs for all eligible home improvements made during the year. Additionally, the $500 lifetime limit will become a $1,200 annual limit on the credit amount, further supporting more Americans to go “green” in the future.
Beginning in 2023, the annual limits for specific types of qualifying improvements will be:
- $150 for home energy audits.
- $250 for an exterior door ($500 total for all exterior doors).
- $600 for exterior windows and skylights; central air conditioners; electric panels and certain related equipment; natural gas, propane, or oil water heaters; natural gas, propane, or oil furnaces or hot water boilers.
- $2,000 for electric or natural gas heat pump water heaters, electric or natural gas heat pumps, and biomass stoves and boilers (the $1,200 annual limit may be exceeded for this category).
High-Efficiency Electric Home Rebates
The High-Efficiency Electric Home Rebate Program, which was added by the Inflation Reduction Act, will provide rebates to low- and middle-income families who purchase energy-efficient electric appliances. To qualify for a rebate, the family’s total annual income must be less than 150% of the median income where they live.
Qualifying homeowners can get rebates as high as:
- $840 for a stove, cooktop, range, oven, or heat pump clothes dryer.
- $1,750 for a heat pump water heater.
- $8,000 for a heat pump for space heating or cooling.
- $1,600 for insulation, air sealing, and ventilation.
- $2,500 for electric wiring.
- $4,000 for an electric load service center upgrade.
What Does It Take to Qualify?
The Inflation Reduction Act requires heat pumps to “meet or exceed the highest efficiency tier” set by the Consortium for Energy Efficiency in order to be eligible for the heat pump tax credit. Currently, CEE’s highest efficiency tiers for air source heat pumps — the heat pumps that heat and cool air in buildings — are significantly stricter than those set by Energy Star, the other major US standard for appliance efficiency, which operates under the Department of Energy and the Environmental Protection Agency.
In fact, less than 10% of heat pumps available in North America meet CEE’s highest standard in the category commonly used for residential central heating. These high efficiency systems also tend to cost at least $3,000 more than the more widely available heat pumps that aren’t quite as efficient, making the heat pump tax credit less appealing for homeowners should the price of the equipment outweigh the heat pump tax rebates themselves.
Efficiency requirements continue to be evaluated, however, as the industry strives to make these heat pump tax rebates more accessible to the general public. Alignment with Energy Star is one key provision being discussed, as there are far more Energy Star rated heat pumps available — about 39% of those currently available in the North American market.
Check For More Local Incentives
In addition to the federal heat pump tax credit, some state, local, and utility incentives may be available for additional savings on installing a geothermal heat pump. Check out the Database of State Incentives for Renewables Efficiency (DSIRE) website to find what geothermal tax credit and other policies are applicable to your area.
Beyond the geothermal tax credit itself, homeowners can actually save more on monthly bills than they pay for the system when installation costs are financed. Added investment over traditional equipment is typically recovered in just a few years, and many homeowners see a return on investment of 10-20% over the life of the system.
Inflation Reduction Act – Heat Pumps in 2023 and Beyond
Change doesn’t happen overnight. It takes a significant amount of time for manufacturers to change their product lines, and waiting for those changes can result in big costs. If more restrictive efficiency standards end up slowing down the broader adoption of heat pumps through increasing prices and minimalizing the impact of the new heat pump tax credits, these regulations could become counterintuitive to the mission of combating climate change.
The International Energy Agency reports that global heat pump installations must triple by 2030 to keep the world on course to achieve net zero carbon emissions by 2050. Unforunately, heat pump installations in the US grew by only about 15% last year.
If compromise can be reached on the energy standards required for these heat pump tax rebates, and manufacturers are able to keep up with any subsequent increase in demand, the future can certainly look a lot greener as more Americans are incentived to take action and make individual contributions to the fight against global warming.
Time will tell, but with these new heat pump tax credits and other efficiency rebates, we’re eager to see how such incentives can help move the needle forward.
