Have you heard of the Inflation Reduction Act but aren’t sure how it impacts you or what you might qualify for as a part of the tax credits and rebates? Are you looking to upgrade your HVAC system but aren’t sure what meets the qualifications?
At Fire & Ice, we’ve been helping customers for years navigate rebates and tax credits for their system upgrades. First, let’s go over what the Inflation Reduction Act is.
What is the Inflation Reduction Act?
The Inflation Reduction Act, which President Biden signed into law on August 16, 2022, is intended to address high inflation by lowering energy costs and healthcare costs and bringing down the country’s debt deficit by taxing corporate incomes with over a billion in profits.
The main area we are going to focus on is the energy costs provision, which gives Americans rebates and credits for making more energy-efficient upgrades to their home, which includes heating and cooling equipment, but more specifically heat pumps.
While the bill is packed with energy-saving credits and provisions, one of the best returns on investment you can get from it is by installing a heat pump.
This brings us to our next point of why and how it impacts heat pumps specifically.
What is a Heat Pump, and How Does it Work?
A heat pump is a high-efficiency system that can replace your furnace and air conditioner. It heats and cools like your air conditioner, and the furnace does but uses a different type of technology. To cool, heat is absorbed by the indoor evaporator coill and transferred to the outdoor unit, where it is emitted. The pressure of the refrigerant in the system, which varies depending on whether it’s inside or out, is what facilitates the absorption and emission.
Heat pumps manage refrigerant pressure differently when heating a home so that heat is absorbed outside, then transferred inside. Furnaces generate heat in and of themselves, traditionally through gas or electric power.
It’s a myth that air conditioners and a heat pump “cool the air.” This is what it feels like if you put your hand over a vent when the air conditioner is running. But the technical process is more about heat transfer than it is about cooling the air.
Types of Heat Pumps
Now that we understand how heat pumps work and the differences between them and a furnace and air conditioner let’s look at some types of heat pumps.
Air-Source Heat Pumps
This is the type that you’ll be most familiar with and that you’ll see in the vast majority of heat pump homes. It absorbs heat from the surrounding air to pump into or out of the home.
Geothermal Heat Pumps
The underlying technology of a geothermal heat pump is the same as an air-source heat pump, but the source of the heat is different. These units generally sit in a basement and absorb ambient heat from the ground itself. This might sound far-fetched, but utilizing geothermal energy for heating and cooling is an ancient practice that predates modern HVAC equipment by thousands of years. These systems, though, are more rarely seen in homes compared to air-source units and traditional air conditioners.
Why Are Heat Pumps Incentivized in This Bill?
Heat pumps are incentivized in this situation because of their overall energy efficiency. This makes them more eco-friendly and helps to drive energy costs down, two overall targets of this bill. Newer models of heat pumps also make them more usable in cold climates, making them more feasible for a more significant percentage of homeowners.
According to Consumer Reports, heat pumps can become more cost-effective over time than traditional HVAC systems.
But what type of upgrades specifically qualify, and how?
What Energy Upgrades Qualify?
There are several things that qualify for energy upgrades, but the ones we are focused on here at Fire & Ice are:
- $600 for air-sealing materials or systems
- $150 for a home energy audit, which can point out ways you can improve your overall energy efficiency. In Ohio, Dominion Energy will perform energy audits. However, if you have AEP, you can have energy audits performed by a third-party vendor.
- $600 for upgrading your electrical supply if it’s required for efficiency projects, for example, to upgrade your electric grid to accommodate a heat pump when you use natural gas to heat your home.
- An up to $2,000 tax credit for heat pumps
Additionally, other benefits are going to be available to homeowners effective January of 2023, including:
$600 towards an air conditioner
Heat pumps up to $2,000
Gas furnaces and boilers up to $600
$50 towards an Advanced Air Circulating Fan, as long as it doesn’t use up to 2% of the home’s total energy use
Included in the bill is also a list of high-efficiency home rebates such as:
Up to $8,000 for all-electric heat pumps
Up to $4,000 for an electrical load service center
Up to $2,500 for electrical wiring
Up to $14,000 for all of the above
Tax section 25C, included as part of the inflation act, is a non-business energy property credit and allows homeowners to be eligible for a tax credit of 10%, or up to $500, on qualified energy improvements.
Tax section 25D, which homeowners are also eligible for, is a 30% tax credit for installing geothermal heat pumps until 2032. This percentage decreases annually to 26% in 2033 and 22% in 2034.
There are also options available outside of the new bill as well. If you are unclear, ask your tax professional for more details.
How Do I Find Out if I Qualify for Energy Rebates or Tax Credits?
Any taxpayer would qualify for the federal credit, and the credit is retroactive and can be used on any energy upgrades you made in 2022 prior to the bill passing. As for the rebate programs,
- If your household income is less than 80 percent of your state’s median household income, you are eligible for 100 percent of the rebates available.
- If your household income is 80 percent to 150 percent of your state’s median income, you are eligible for 50 percent of the rebates available.
- If your household income is more than 150 percent of your state’s median income, you are not eligible for these rebates.
- You can check your median income using this tool from Fanny Mae, Area Median Income Lookup Tool (fanniemae.com)
Rebate vs. Tax Credit: How Are They Different and Which Can I Use?
This bill includes both rebates and tax credits, which are easily confused for one another but are handled differently.
A rebate is a money that you would get back from your state. While specific guidelines on how each state will handle the rebates currently, they should be rolled out in the next couple of months through the Department of Energy.
The tax credit portion is a little less confusing.
Tax credits are what they say, credits you would get back on your taxes at the end of the year and would be included in any tax return. You would claim these on your federal income tax returns. As to what form you would fill out, that is not clear, but the IRS 5695 has been used in the past for a similar program. If you are unsure about specifics, please consult your tax professional once more guidelines become available. The IRS has stated that they are going to begin providing guidance and have asked the public to provide input by November 30th of 2022.
Despite the confusing language, we are committed to helping our customers get the best value for their money and take advantage of these offerings. More offerings are expected to come or be made clearer as more information becomes available. Check out our promotions page for other deals you could qualify for in upgrading your HVAC system.
How is Fire and Ice Helping You?
At Fire & Ice, we will do all we can to help our customers take the most advantage of this newly implemented law. Feel free to ask us any questions, and we will do our best to help; if we cannot help you, please seek advice from a tax professional about your situation.
Next Steps to Making Your Home Energy Efficient
If you’re ready to take the next step in taking advantage of the new legislation on your home’s heating and cooling needs, feel free to call us. If you live in Columbus, OH, check to see if you are within our service area by using the zip code map below.
Additionally, if you feel ready to take the next step, schedule your free estimate today by using the button below.