If you’re looking to install a new heating and cooling system this year, we have some excellent news for you! Earlier this year, the US government introduced a new set of tax credits and rebate savings incentives to encourage homeowners to use greener energy.

The incentives form part of the Inflation Reduction Act that was signed into law in Aug 2022. As part of the drive to reduce America’s energy bills and global warming, the Government is encouraging homeowners to switch to energy-efficient heat pumps.

What does this mean for you?

In simple terms, if you want to upgrade to an energy-efficient heat pump cooling and heating system, these new laws now make it more affordable than ever. You could even be eligible for the full $8,000 rebate amount for home improvements.

What’s more, by switching to greener energy, you’ll reduce the effects of climate change. So read on to learn more about heat pumps and the savings you can make with replacement installation.

The Inflation Reduction Act

Confused about what the Inflation Reduction Act (IRA) contains? We’ve broken it down, so you get the relevant information.

The Background

The IRA was established in 2022 to help direct federal spending toward issues like climate change, healthcare costs, and tax compliance. The largest climate bill of its kind, the IRA was designed with the hope that by offering cash incentives, homeowners will join the campaign to help save the planet, and America will reduce its emissions by nearly 40% by 2030.

What the Act Means for You

Let’s break it down even further. If you’re a homeowner keen to change to greener energy, like electric vehicles and heat pumps, you can claim a tax credit to help ease the cost. These Energy Efficient Tax Credits up to the value of $1,200 can be used for eligible home installations, including:

  • Heat pumps
  • Electrical panels
  • Exterior doors
  • Appliances

If you’re from a low-to-moderate income household, you could qualify for the IRA’s heat pump rebate, from between 50% to the full installation costs of your heat pump. That’s a considerable saving to be had. Even better, you get a rebate on purchase (point of sale rebate), meaning you don’t have to pay the full costs upfront.

What is a Heat Pump?

Unlike traditional heating systems that burn fuel to generate heat, a heat pump transfers heat from outside your home to inside. It’s a clever and intuitive design that uses natural sources to heat or cool your home.

Heat pumps extract heat from the air, ground, or water and transfer it indoors to heat your living space. This energy-efficient system can significantly lower your heating costs, especially if you live in a moderate climate.
How does a heat pump work? It’s based on coils and refrigeration chemicals. The refrigeration liquid heats up in the outer coil, eventually turning into a gas. As it heads towards your home, a compressor causes it to heat up even more. Finally, it hits your home’s condenser coil, turning it back into liquid. During this process, it releases heat energy, warming your home. It’s then pumped back outside to begin the process all over again.

Another plus point is that a heat pump heats and cools, unlike traditional systems where you need an air conditioner and furnace for year-round comfort. However, it’s essential to note that heat pumps may not be suitable for areas with extreme weather conditions. Therefore, it’s advisable to consult a professional HVAC contractor to determine if a heat pump is right for your needs.

Benefits of an Energy-Efficient Heat Pump

There are several benefits to having a heat pump installed, including the following:

Lower Utility Bills

Heat pumps use less energy than other heating systems, so you can save money on your energy bills each month. Combined with the available rebates and tax credits, this is a great way to save money now and in the future.

State Requirements

In some areas, you are now required to use greener forms of energy as they shift toward a zero-carbon emissions policy. This varies by state, but more and more states are adopting greener initiatives.


Switching to a heat pump means burning less fuel and using natural sources to heat your home. Because eco-friendly appliances use only as much energy as they need, this has a positive impact on the environment without compromising your home’s comfort.

Which Systems Qualify?

Here’s the thing, not every heat pump system qualifies for a tax credit or rebate savings. So, before buying a heat pump, ensure it meets the Federal Energy Efficient Heat Pump guidelines.

Energy Star Systems

The Energy Star Certification program guarantees that you’re getting a thoroughly checked and certified heat pump. Before being awarded an Energy Star certification, a product goes through rigorous testing in laboratories overseen by the EPA.

Different Systems Covered

Heat pumps aren’t the only appliances covered by the legislation. You can also save on air-conditioning units, furnaces, and boilers as long as they meet energy-efficiency standards.

CEE Tier 1 & 2 Requirements

To qualify for the rebates on heat pump purchase, the heat pump should be in CEE tier 1 or 2, depending on the product type. For example, CEE Tier 1 is for split system ducted heat pumps, whereas non-ducted heat pumps fall into Tier 2.

What Federal Tax Credits Are Available

Before 2023, you could only claim a tax credit up to the value of $500. The IRA changed that for 2023, allowing households to now claim up to $1,200.

Tax 25C

This tax credit is a nonbusiness property energy credit. It allows you to claim up to 30% capped tax credit for installing energy-efficient products like heat pumps, water heaters, and electric panels or for carrying out energy audits.

The excellent news about this credit is that it’s not a lifetime credit. It renews yearly. Anyone with adequate tax liability to offset can qualify for Tax 25C.

Tax Credit Amounts

There are various amounts allocated to different products and appliances. The principal amounts are as follows:

  • Heat Pumps – up to $2,000
  • Air Conditioners – up to $600
  • Furnaces – up to $600

HEEHRA Act Energy Efficiency Rebates

The IRA also introduced a High-Efficiency Electric Home Rebate Act (HEERA) to help homeowners with lower incomes benefit from switching to greener energy sources.

If your income is 80% lower than the average income in your area, you can claim the total amount of your heat pump (up to $8,000). In addition, households whose income is between 81%-150% receive up to a 50% rebate on Federal energy-efficient heat pumps.

And it’s not only heat pumps that HEERA covers. It also covers the following:

  • Electric stove/cooker top $640
  • Electric wiring $2,500
  • Weatherization $1,600
  • Heat Pump Water Heater $1,700

Plus, other rebates for making your home more energy efficient. But note these rebates may not be available in all states.

Save More with Local Energy Rebates

It doesn’t stop there. Added to the national tax credit or rebate savings are the local initiatives. Different state energy offices offer extra financial incentives to encourage citizens to switch to greener energy.

Take a look at your local area to see which programs you may be eligible for.

Or check out the Energy Star Rebate Finder to see if you qualify for rebates on Energy Star-certified products.

Combining State and Federal Rebates

As the new IRA regulations and federal rebates are new this year, it’s likely the state rebates and payments may also be subject to change. However, as long as state rebates aren’t funded by Federal money, you should be able to combine the two.

The combination of state and federal rebates is still an area of discussion, so speak with your local energy office to find out more.

How to Apply for Tax Credits and Rebates

Before applying, you need to know the key differences between tax credits and rebates.

Tax credits are for households who don’t fall under the HEEHRA low and moderate-income households. You apply to claim a tax credit when you file your yearly tax return, so you pay the full price upfront and claim some money back via your tax form. In a nutshell, they reduce the tax you pay or increase your tax refund.

On the other hand, a rebate can be applied when purchasing the product. It’s more like a discount. You choose a contractor, apply for the rebate, and it’s taken off the final price.

Still trying to figure out tax credits? The best way to find out how to apply and to ensure you fill in your tax form correctly is to consult your tax advisor. Seeking help from an expert is the best way to ensure you get the savings you’re entitled to claim.

It’s hoped that the tax credits and rebates will continue until 2032. However, if you’re keen to switch to sustainable energy sources, think about carrying out the work sooner rather than later.

Ready to make the most of the IRA legislation? Call the HVAC experts at JW Plumbing, Heating and Air and find out what savings you’re eligible for when converting to energy-efficient heating systems.

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