How federal tax credits work

Heat Pump
Mini Split
Written by
Max Veggeberg
October 30, 2023

Please note: The content of this blog post is for informational purposes only and should not be construed as tax advice. Always consult with a qualified tax professional before making decisions regarding your taxes.

Inflation Reduction Act: Federal Tax Credits for Heat Pumps

The Inflation Reduction Act of 2022 (IRA) includes a number of provisions designed to make clean energy more affordable and accessible to homeowners and businesses. One of the most important provisions is the expansion of the federal tax credit for heat pumps.

What is a heat pump? See this blog post for more information

How much are you eligible for in IRA tax credits?

Depending on your project size and which upgrades you move forward with:

Build your project and find out exactly how much you’re eligible for and how it will impact your project price.

Who is eligible for the IRA tax credits?

Requirement 1: you need to install qualifying equipment. Don’t worry, we only install qualifying equipment 🙂

Requirement 2: the heat pump will need to be installed in your primary residence.

Requirement 3: you must owe more than the tax credit.

For instance, if you only owe $1,500 in taxes, then you will only be eligible for $1,500. Most homeowners will be able to take advantage of the full tax credit, but this is the most confusing requirement so we’ll provide some extra detail.

Scenario 1: Salaried or hourly employee

These are sample numbers.

In this example, the homeowner owes $17k in taxes to the IRS. Their accountant will then file Form 5695 claiming the heat pump tax credit for $2k. Therefore, the taxes owed at the end of the year are only $15k.

Throughout the year, the homeowner’s employer took out a small amount per paycheck in withholdings as they are legally required to do, which added up is $20k. The homeowner only owes $15k so the government gives them a refund of $5k ($20k paid minus $15k owed).

We used a $100,000 income in this example to use a round number, however you can see that most homeowners earning an annual salary, hourly pay, or are self-employed will qualify for the tax credit because it’s dedicated from your withholdings.

Scenario 2: Fixed income, unemployment, or other forms of non-taxable income

These are sample numbers

This is an important point because the heat pump tax credits are on a “use it or lose it” basis, which means you need to be able to claim the full tax credit in the year the equipment was installed.

Filing form 5695 on your taxes

To receive this tax credit, you will need to work with a qualified tax professional to fill out Form 5695.

Here is a link to the IRS website with information about this form

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