Heat Pumps Deliver Major Savings for American Families

May 10, 2024

Through tax credits and rebates, President Biden’s Inflation Reduction Act (IRA) provides new opportunities to homeowners and renters to make energy efficient upgrades, such as heat pump installations, to their homes. Heat pumps are a year-round heating and cooling solution for many homes and climates; they are energy efficient and save money.

Provisions available to homeowners installing heat pumps include the IRA’s Energy Efficient Home Improvement Credit, the Residential Clean Energy Credit, and the Home Electrification and Appliances Rebate Program. Each can help taxpayers defray the costs of making energy efficient upgrades to their homes including the cost of a new heat pump. For low to moderate income homes, rebates and tax credits can be combined to further reduce upfront costs.

The Energy Efficient Home Improvement Credit (§ 25C) provides a tax credit for energy efficiency upgrades. This credit covers 30 percent of the cost of home improvements such as qualifying heat pumps, which are eligible for a credit of up to $2,000, as well as upgraded windows, doors, insulation, biomass stoves, water heaters, and boilers, which are subject to certain annual caps. The credit also provides 30 percent of costs up to $150 for home energy audits that identify potentially significant and cost-effective energy efficiency improvements to a home and that provide an estimate of the energy and cost savings for each improvement.
The Residential Clean Energy Credit (§ 25D) covers up to 30 percent of the costs of qualifying home improvements that include certain geothermal heat pumps as well as qualifying solar water heaters, solar installations such as panels, small wind installations, fuel cells, and battery storage.
The Department of Energy’s Home Electrification and Appliances Rebate (HEAR) Program is focused on efficient electrification projects for low-to-moderate income (LMI) households. To qualify, projects must apply rebates as Point-of-Sale incentive program instant discounts. Installer incentives up to $500 are allowed.

Additional information on these credits can be found on the Treasury Department’s Taxpayer Resource Hub.

Why Heat Pumps?

Heat pump systems work in every season, providing energy efficient solutions for heating and cooling homes. Unlike furnaces, which generate their own heat, heat pumps use energy to move heat in and out of a home as needed. The process makes heating and cooling homes cheaper and more energy efficient.

Though historically heat pumps have primarily served homeowners in warmer climates, recent Department of Energy initiatives are enabling the deployment of heat pumps in climates that experience subzero temperatures, making heat pumps a valuable tool for homeowners throughout the United States.

There are several kinds of heat pumps, designed to serve the varying needs of homeowners across the country:

Air-source heat pumps transfer heat between a house and the surrounding air. They have two metal coils and contain a liquid refrigerant that evaporates and condenses to transfer heat. They can be either ducted or ductless, and can reduce electricity use by roughly 65 percent.
Geothermal heat pumps transfer energy from water or from the ground to and from a home. Though geothermal heat pumps can be more expensive to install, they have low operating costs and can reduce energy use significantly – sometimes up to 80 percent.
Absorption heat pumps operate similarly to air-source heat pumps, but instead of electricity, they use heat or thermal energy as their primary energy source.

Each type of heat pump has the potential to save consumers money while also reducing their carbon footprint.

Case Studies

The following hypothetical scenarios illustrate the value that heat pumps can provide individuals, especially when used in tandem with credits or rebates in the IRA. Note that savings sums over time are left undiscounted.

Case Study A

The Pompapanas family has a higher-than-average monthly electrical heating and cooling bill of $200^[1] and is interested in buying an air-source heat pump for $12,000.^[2]They take advantage of the Energy Efficient Home Improvement Credit, saving $2,000 on their year-end tax return, so the net cost is effectively $10,000. Adding a heat pump reduces the Pompapanas family’s average monthly electricity bill by 65 percent^[3] from $200 to $70, saving $130 a month, or $1,560 a year. After 7 years, they will have saved more in energy bills than the upfront cost they paid for the pump. Over 15 years, the family could save as much as $13,400 in net savings.

Case Study B

The Antlia family lives in a large home with an average monthly electrical heating and cooling bill of $400. They are looking to install a $20,000 geothermal heat pump in their home and to finance the cost over time. Their bank offers them a $15,000 home improvement loan at 10 percent interest to be paid over 15 years with a $5,000 downpayment. They take advantage of the Residential Clean Energy Credit, saving 30 percent of the cost of the geothermal heat pump, or $6,000 on their year-end tax return.

After installing the heat pump, the family’s average monthly utility bill is reduced 75 percent^[4] from $400 to $100 a month, saving them $300 a month, and a total of $3,600 a year.

Over the term of the loan, they will make monthly payments of $161, meaning they will have net monthly savings of $139 a month, or $1,668 annually. By the time the loan is paid off in 15 years, the family will have saved approximately $20,000 with their geothermal heat pump after accounting for loan costs.

Case Study C

Heat pump installations can also benefit low-to-moderate income (LMI) households. The Varmepump family, a moderate-income family, buys an air-source heat pump for $16,000 for their new home. They get a Home Electrification and Appliances Rebate, which saves them $8,000 of their heat pump expenses. If the Varmepump family have sufficient tax liability for that year, they can also take advantage of the Energy Efficient Home Improvement Credit, saving $2,000 on their year-end tax return, so the net cost is effectively $6,000. Adding a heat pump reduces the Varmepump family’s average monthly electricity use for heating and cooling from $150 to $60, saving $90 a month, or $1,080 a year. After 6 years, they will have saved more in energy bills than the upfront cost they paid for the pump. After 12 years, the family will save $6,960 in energy costs.

Conclusion

The Inflation Reduction Act, through the Energy Efficient Home Improvement Credit, the Residential Clean Energy Credit, and the Home Electrification and Appliances Rebate (HEAR) Program, is enabling households, including low-to-moderate income (LMI) households, to power their homes more efficiently and save money. Consumers buying heat pumps outright, with the help of a consumer loan, and/or with the help of a rebate, have the potential to realize tremendous climate and economic impacts. Heat pump buyers can save money on installation costs up front and on energy bills well into the future.