What does the Inflation Reduction Act mean for air source heat pump adoption?
The recently passed Inflation Reduction Act (IRA) includes significant incentives aimed at improving energy efficiency in Minnesota homes and businesses through federal tax credits and rebates. These programs have the potential to accelerate heat pump adoption and change the HVAC industry for years to come. Read on to learn more about the current 25C deductions, changes coming in 2023, and future federal rebate programs.
What benefits are available now?
An extension of the earlier 25C Energy Efficient Home Improvement Credit is available through the end of 2022 with a $500 lifetime cap.
- Heat pumps qualify for a tax credit on 10% of the project cost, up to $300. The heat pump must be installed in an existing primary residence (the credit does not apply to new construction or multifamily).
- Heat pumps must be ENERGY STAR certified to qualify for this tax credit. More information about the tax credit and qualifying equipment can be found here.
What’s changing in 2023?
Starting January 1, 2023, the 25C tax credit will increase to 30% of the cost for all eligible home improvements made during the year by a taxpayer in a residential home.
- The credit has an annual cap of $1,200, except for heat pumps and heat pump water heaters, which qualify for a $2,000 credit.
- As the annual cap resets each year, a homeowner could perform work in stages to claim maximum tax credits (for instance, air sealing and insulation one year and a heat pump the next year).
- In 2023, qualifying heat pumps will need to meet the Consortium for Energy Efficiency’s highest efficiency tier specifications (not including any advanced tier). These criteria are listed in the table below.
What benefits will be available in the long run?
The U.S. Department of Energy will distribute funds to state energy offices across the country. These funds will provide rebates through two programs that can be used in conjunction with a tax credit to further incentivize heat pump equipment installations. Implementation of these programs will take more time, as state energy offices will need to submit plans to administer these rebates in accordance with DOE guidance.
The Home energy performance-based whole-house (HOMES) Rebate Program will provide rebates for whole-home retrofits based on modeled or measured energy savings.
- This rebate can be used for heat pump installations and HVAC upgrades.
- Homeowners can qualify for rebates on 50% of project costs, up to $2,000 for 20% energy savings or $4,000 for 35% energy savings.
- Households below 80% of Area Median Income qualify for rebates on 80% of project costs, up to $4,000 for 20% energy savings or $8,000 for 35% energy savings.
The High-Efficiency Electric Home (HEEH) Rebate Program will provide rebates to low- and moderate- income households (at or below 150% of the Area Median Income) for energy efficiency upgrades and electric equipment.
- Homeowners can qualify for rebates on 50% of project costs or 100% of project costs for households below 80% AMI.
- Heat pumps will qualify for up to $8,000.
- The program also includes rebates for upgrading electric panels and wiring.
The HOMES and HEEH rebates are not intended to be used on the same home.
Additional Resources
Clean Energy Resource Teams – A Minnesota-specific collection of homeowner-focused resources on IRA programs, including information on Area Median Income to help households estimate which rebates they qualify for. Make sure to check out the additional resources linked at the bottom, including an interactive savings calculator.
The Building Performance Association – A trade association and support organization for HVAC and Home Performance contractors.
ACEEE Policy Brief: Home Energy Upgrade Incentives – A more in-depth summary of energy efficiency programs in the IRA.
The information above is a high-level overview of the Inflation Reduction Act of 2022 and how it ties to Air Source Heat Pumps and weatherization/home performance. Please consult a tax professional to determine how tax credits apply to your organization or personal finances.
