The Pearl App Guide to Heat Pump Rebates and Tax Credits – Pearl Certification

Looking for a safer, more cost-effective way to heat and cool your home?

Clean heating and cooling alternatives like heat pumps are more affordable than ever and are now supported by federal rebates and tax credits to help you save, thanks to the historic Inflation Reduction Act. Heat pumps generate three to five units of heat per each unit of electricity needed to power them — that's the kind of efficiency that can translate into serious savings on your monthly utility bills.

It's a whole new way to think about heating and cooling your home. We'll show you how heat pumps work, how they can help you save, and break down all the rebates and tax credits at your disposal to help you make the right decision for your home.

The Power of Heat Pumps

Heat pumps offer an energy-efficient alternative to traditional HVAC systems. Their edge comes from their unique design. Rather than creating heat the way a furnace does, heat pumps move heat from one place to another. In other words, to heat your home, a heat pump will absorb and compress air from outside and convert it into the appropriate temperature before releasing it back to your home. But don't sweat — despite its name, you can rely on your heat pump to cool your home too. Your unit will simply reverse the heating process to generate cool air during the sweltering summer months.

Heat pumps can be beneficial in a number of ways. For starters, heat pumps run continuously to provide a steady stream of even climate control. Furnaces, on the other hand, run on much shorter cycles. Because they start and stop more often, furnaces are prone to overheating as they work to compensate for inactive intervals. This can lead to periods of discomfort, as your home will likely be either too hot or too cold at various points throughout the day.

In fact, continuously running is part of what makes heat pumps more energy efficient. Even though furnaces power down more often, the constant stop and start is actually more energy intensive in the end. On top of that, heat pumps are combustion-free and generate no harmful gasses, which makes them even more efficient and safe for you and your family.

How Much Does a Heat Pump Conversion Cost?

Heat pumps can reduce your electricity use by approximately 50%, which can translate to meaningful monthly savings on your electric bill. Of course, switching to electric heating through a heat pump will come with some upfront costs, but don’t forget that a heat pump both heats and cools so you’re essentially purchasing a two-for-one furnace and air conditioner. Upfront costs will also vary based on factors like the square-footage of your home or if you'll need additional work like ductwork installation or repair.

To get the most out of your investment, make sure your new heat pump has been installed in conditions to set you up for savings success. That means prioritizing air sealing and insulation and making sure your heat pump has been prepared and installed by a professional, like the vetted contractors in the Pearl Network, to ensure maximum energy-efficiency.

Rebates and Tax Credits to Help You Save

Fortunately, you won't have to shoulder all those upfront costs on your own. Through the 2022 Inflation Reduction Act (IRA), the government allocated $8.8 billion in rebates for energy efficiency and home electrification projects, along with key tax credits that can help you save on heat-pump-related purchases and installations.

High-Efficiency Electric Home Rebate Act (HEEHRA)

HEEHRA has allocated $4.5 billion dollars to state governments to help low- and moderate-income homeowners make their homes more energy efficient. HEEHRA works through point-of-sale — meaning when you buy, say, your new heat pump, the savings will be applied automatically. How much you ultimately save will depend on your household income. Households making less than 80% of their area median income (ARI) qualify as "low-income", while those making 80-150% of their ARI are classified as "moderate."

For low-income households, the rebates from HEEHRA can be huge. The program offers 100% rebates (up to $14,000) for qualifying purchases. For those in the moderate income bracket, the savings can be substantial as well, clocking in at 50% (again up to $14,000).

Qualified rebates under HEEHRA cover a variety of home electrification purchases, including quite a few that could help you in a full-scale heat-pump conversion:

HEEHRA Rebate	Savings
Heat pump HVAC systems	$8,000
Heat pump water heaters	$1,750
Heat pump clothes dryer	$840

Rebates are expected to be available later in 2023 and will be available until September 30, 2031.

Even better, purchases related to "enabling measures" qualify for rebates as well. In other words, all the insulation and air sealing work we mentioned to go along with your new heat pump can come at a discount as well.

Homeowner Managing Energy Savings program (HOMES)

Like HEEHRA, HOMES allocates $4.3 billion dollars to individual states to provide homeowners with rebates on projects related to energy efficiency. However, the rebates issued through HOMES are a bit different.

HOMES offers rebates based on home performance measured by two distinct models: modeled-performance and measured-performance rebates.

Modeled-performance rebates

Modeled-performance rebates are based on the projected ability of how much an improvement — in this case, your new heat pump — improves your home's energy efficiency. This is determined by a BPI-2400-compliant energy modeling software that will establish an initial baseline for your home's energy usage and propose a new model based on its historical usage.

What does that look like in practice? Let's say you installed your new heat pump and are ready to go, and you qualify as a low or moderate-income home (HOMES income requirements are the same as HEEHRA's):

energy system savings of at least 35% make you eligible for the lesser of $8,000 or 80% of the project cost
energy system savings of less than 35% but more than 20% make you eligible for the lesser of $4,000 or 80% of the project cost

If you qualify as a high-income home, the numbers look like this:

energy system savings of at least 35% are eligible for the lesser of $4,000 or 80% of the project cost.
energy system savings of less than 35% but more than 20% are eligible for the lesser of $2,000 or 80% of the project cost.

Projects that result in energy savings of less than 20% aren't eligible for rebates, regardless of cost.

Measured-performance rebates

Measured-performance rebates are based on your home's actual energy performance. That means using an approved open-source measurement and verification (M&V) software to confirm your home's energy efficiency. These rebates are structured similarly to the modeled-performance rebates previously discussed:

For low- and moderate-income homes: Retrofits that achieve energy system savings of at least 15% are eligible for a payment rate per kilowatt hour saved, or kilowatt hour-equivalent saved, equal to $4,000 for a 20% reduction of energy use for the average home in your state or 80% of the project cost.
For high-income homes: Retrofits that achieve energy system savings of at least 15% are eligible for a payment rate per kilowatt hour saved, or kilowatt hour-equivalent saved, equal to $2,000 a for a 20% reduction of energy use for the average home in your state — or 50% of the project cost.

Projects that result in energy savings of less than 15% aren't eligible for rebates Additionally, the bill doesn't specify that homeowners pursuing measured-performance rebates are automatically given the lesser of the amounts above, but it may be wise to operate under that assumption.

Related Post: Is a Heat Pump Right for Your Home?

How to Secure Your Rebates

HEEHRA rebates are simple: They're triggered at point-of-sale, which means savings should be applied right at checkout. HOMES will likely require an extra bit of work, however, specific guidance isn't yet available.

Since performance measurements are critical to calculating savings, documentation will likely be involved related to the amount of energy saved (or expected to be saved), along with any costs tied to purchases or installation. It is possible for individual states to choose not to participate in these rebate programs. Fortunately, tools like Rebates Finder in the Pearl App automatically update with available rebates programs, so check your account frequently to see if there’s a HOMES rebate available in your state.

Tax Credits

Is it possible to look forward to tax season? If you buy a new heat pump between now and 2033, it very well could be. The 2022 IRA has introduced a series of tax credits to help homeowners save as they undergo environmental-friendly home upgrades. Keep in mind that these credits will begin to shrink in 2033, when they'll drop from 30% to 26%, and down again to 22% in 2034.

The two that will be most helpful to you with regards to heat pumps are:

Energy efficient home improvement tax credits (Code § 25C)

If you're moving forward with a heat pump conversion, Code § 5C will be your best friend. Homeowners who make efficiency upgrades with items like improved heating equipment or a biomass stove can claim a rebate of up to $1,200 or 30% of the project costs on their annual tax returns. That includes items like heat pumps and heat pump water heaters.

In fact, homeowners who install heat pumps can claim up to $2,000. Even better, additional insulation work also qualifies, and homeowners who elect to undergo a home energy audit through their utility provider can claim an additional credit of $150. In total, homeowners can claim up to $3,200 in energy efficient home improvement tax credits each year.

Clean energy tax credits (Code § 25D)

Under Code § 25D, homeowners can qualify for a 30% tax credit on purchases of or expenditures related to certain clean energy purchases. That involves upgrades like solar or wind power generation, but geothermal heat pumps that meet ENERGY STAR^® requirements are also eligible here.

In order to qualify, any purchases you make must be for use at your primary residence. You can claim credits for a vacation home or rental property, however the percentage will be reduced and based on the amount of time you spent living on premises during the year.

Claiming your credits

The good news is claiming these credits is pretty simple. Just file IRS Form 5695 as part of your tax return. Calculate the credit on Part I, and enter the total on your 1040. If, when it's all said and done, your credit is greater than the amount of income tax you have due, the difference will be carried over to the following year. As a bonus, if you forget to claim the credit one year, you can still file an amended return to get your savings.

Go Forth With the Pearl App

Federal tax credits and rebates abound, but there may still be even more ways that you can save. Many state and municipal governments and even manufacturers like ENERGY STAR offer credits and incentives of their own.

Of course, you want to make sure you're getting the most bang for your buck when it comes to your new heat pump, but keeping track of all the credits and rebates available can be a lot. Fortunately, the Pearl App's Rebates Finder is here to help. Browse local rebates and tax credits so you never miss out on savings right from the app. The documentation you need to claim them is available right there too, and the app is regularly updated to ensure you always have the most up-to-date information.

When you're ready to investigate heat pump heating options, the Pearl App will be your guide. The app is free to use and will connect you with vetted local contractors from the Pearl Network. Proper equipment selection and installation are key to landing a Pearl Certification, and your contractor will be well-versed in all the ins and outs of the process to help you get the most energy efficiency out of your upgrade.

Ready to take the next step to determine if a heat pump is right for your home? Log in to the Pearl App to start exploring your options today.