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Heat pumps get special tax break in Inflation Reduction Act's home energy enhancements

A heat pump's outdoor unit is pulling what warmth it can out of the air in freezing conditions. (Photo by Peter Eastern via Wikipedia Commons)

North winds are gusting up to 30 mph right now here in suburban Austin, Texas. By sunset, we'll be at freezing, with temperatures in the area tonight expected to drop to between 10 and 15 degrees.

Despite my alternately freaking out thanks to memories of 2021's snow, ice, and prolonged freezing temperatures that led to extended electric and water utility outages across most of Texas, ranting, and stuffing old hand towels into every new window leak I discover, this cold snap isn't supposed to be that bad for us. Fingers and toes are crossed in my mittens and socks.

Others, however, are not as lucky. They are getting or soon will face much worse conditions. Here's hoping everyone is ready and weathers this arctic blast safely.

One thing many of us will share, regardless of the relative strength of this winter blast where you are, is the unwanted discovery that our homes could use some energy upgrades (note my towels in leaky windows reference earlier).

If you find that your home itself or your HVAC system in particular isn't up to extreme Mother Nature moods, be they single digit temps now or triple digit heat in the summer, the Inflation Reduction Act might be able to help.

New home energy efficient tax breaks: That legislation, which became law on Aug. 16, is full of clean energy and climate change provisions. One that's going to get a lot of attention is the Energy Efficiency Home Improvement Credit.

The new tax credit is a revision of the prior home-related energy tax break. This latest version increased the prior credit from 10 percent to 30 percent, and now provides up to $3,200 annually in individual tax credits to help taxpayers lower the cost of energy efficient upgrades.

Covered items include heat pumps, insulation, energy efficient doors and windows (yay!), electrical panel upgrades, and energy audits.

Taxpayer eligibility and product standards also are modified. And notably, the $500 per taxpayer lifetime credit limit in the old tax benefit has been eliminated and replaced by a credit that maxes out at $1,200 each year.

That means beginning in 2023, a taxpayer can claim the maximum Energy Efficient Home Improvement Credit allowed every year that eligible improvements are made. The credit will be available for 10 years, expiring at the end of tax year 2032.

However, there still are separate per year caps within the overall credit for certain residential energy improvements. The table below details those, as well as looks at the differences between the Energy efficient Home Improvement Tax Credit now in the Internal Revenue Code and the one that supplants it next year.

Energy Efficient Home Improvement Credit:
Major Changes Between 2022 and 2023-2032 Versions


Tax Year 2022
Federal Return filed in 2023

Tax Year 2023
Federal Return filed in 2024
(and subsequent tax years through 2032)

Credit Rate



Qualifying Expenses

Qualifying energy efficiency improvements installed during the year, and expenses related to energy efficient property paid or incurred during the year.

Investments must meet energy efficiency criteria set by statute.

Expenses related to qualifying home energy audits paid or incurred during the year will also qualify.

The energy efficiency standards that investments must meet to qualify will change and update automatically in the future.

Starting in 2025, taxpayers must report their products’ identification numbers to claim the credit

Definition of "energy efficiency improvements"

Improvements to heating, cooling, and water heating equipment, and to a building's "envelope," which includes the insulation materials or systems, the roof, and exterior doors and windows.

Investments in roofs will no longer qualify, but certain investments in biomass stoves and air sealing material placed in service in 2023 or later will.

Improvements to, or replacement of, panelboards, sub-panelboards, branch circuits, or feeders also qualify beginning in 2023.

Definition of "energy efficient property"

Spending on heating, cooling, and water-heating property that meets efficiency criteria.

Associated labor and installation costs also qualify.

Expenditures must be made on the taxpayer’s primary residence located in the United States.

Expenditures made for homes the taxpayer uses as a residence, whether or not as their primary residence, will qualify.

Lifetime Limits

$500 per taxpayer for the entire credit

$200 for windows.

No lifetime limits

Annal Limits

$300 for any single energy property item

$150 for any qualified natural gas, propane, or oil furnace and hot water boiler

$50 for any advanced main air circulating fans

$1,200 for the entire credit for most taxpayers

$600 for any single energy property item

Notwithstanding these limits, the credit for qualifying expenditures on biomass stoves or water heaters and/or heat pumps powered by electricity or natural gas is capped at $2,000.

$600 on windows

$150 for home energy audits

$500 for exterior doors in the aggregate

$250 per exterior door


The credit expired at the end of 2021. The Inflation Reduction Act extended it, with 2021 parameters, for 2022.

The credit takes effect Jan. 1, 2023, and will expire after 2032.

Source: Congressional Research Service analysis of IRC Section 25C and P.L. 117-169

Heat pump primer:
 As the table shows, there's also a separate $2,000 limit for heat pumps. The cost of labor to install it counts toward calculating the credit.

Since most of us in the United States are cranking up our heating systems now, here's a closer look at the heat pump provision. And at the unit itself.

Like the air conditioner component in a home with central air, a heat pump can cool your home, but it also provides heat. In cooler months, a heat pump pulls heat from the cold outdoor air and transfers it indoors. When it's warmer, the unit pulls heat out of indoor air to cool your home.

Heat pumps do not burn fossil fuel like traditional furnaces do, and are instead powered by electricity. In colder climates where there's less heat to pull from the air, you can add an electric heat strip to the indoor fan coil for additional capabilities.

Heat pumps generally are rated as more environmentally friendly. They are estimated to save households up to $500 in energy costs every year.

We had a heat pump when we lived in Maryland and it worked pretty well. I admit, though, that when we got cold snaps like this one, the shift to electrical backup to ensure warmth did run up that utility bill.

Heat pump tax help: To get the federal tax credit for your new heat pump, you must purchase and install next year a model that attains the Consortium for Energy Efficiency’s (CEE) highest tier for efficiency.

Taxpayers typically claim qualifying home energy upgrade expenses in the year in which they install the eligible property in their homes.

The credit for 2022 is claimed on IRS Form 5695, Residential Energy Credits, that's attached to Form 1040 by Tax Day. The form likely will be revised to accommodate the Inflation Reduction Act changes.

You can read more on the new Energy Efficient Home Improvement Credit in the IRS Fact Sheet issued today, as well as the Biden Administration's Inflation Reduction Act Guidebook.

I hope your heating system holds out until the Arctic blast passes. If you do need to replace it in the coming new year, check out how Uncle Sam's tax credits can help.

And to keep track of the Arctic Blast, check out the National Weather Prediction Center.

NWS NOAA Arctic Blast Dec 22-25 2022

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