Guide · 9 min read · Updated 2026-04-21
The 2025 Federal HVAC Tax Credits (IRA Explained)
The Inflation Reduction Act runs two parallel federal HVAC incentives — §25C (a tax credit) and HEEHRA (an income-qualified point-of-sale rebate). Most homeowners qualify for one or both. Here's how each works, what qualifies, and the stacking rules that confuse even tax preparers.
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The two programs: tax credit vs point-of-sale rebate
The IRA created two different federal HVAC incentives, each funded and administered separately.
§25C (Energy Efficient Home Improvement Credit) is a federal income-tax credit — you claim it on your tax return, and it reduces what you owe. No income limit. Available to every US homeowner who installs qualifying equipment.
HEEHRA (High-Efficiency Electric Home Rebate Act, often shorthanded "IRA heat pump rebate" or "HOMES") is a point-of-sale rebate — you pay less at purchase, no tax filing needed. Limited to households at or below 150% of Area Median Income (AMI). Administered by each state's energy office; rollout continues through 2026.
- §25C: 30% of project cost up to $2,000/year for heat pumps (separate $1,200/yr cap for other upgrades)
- HEEHRA: up to $8,000 for a qualifying heat pump for <150% AMI households
- §25C runs through December 31, 2032
- HEEHRA funds are capped per state and phasing in; check your state energy office
§25C: the $2,000 heat pump credit
§25C pays 30% of the installed cost of a qualifying heat pump, heat pump water heater, or biomass stove, up to $2,000 per tax year. Example: install a $9,000 heat pump, get $2,000 back at tax time (30% × $9,000 = $2,700, capped at $2,000). Install a $6,000 heat pump, get $1,800 back. The credit is nonrefundable — it reduces your tax liability but doesn't generate a refund beyond what you owe. If you have $1,200 in federal tax liability and $2,000 in credit, you get $1,200 back this year and the unused $800 does NOT roll over.
Claim on IRS Form 5695, Residential Energy Credits, attached to your Form 1040. You'll need the manufacturer certification statement (most equipment comes with one) and proof of installation by a qualified contractor. Equipment must meet the CEE Highest Efficiency Tier — most ENERGY STAR cold-climate heat pumps qualify.
HEEHRA: the $8,000 income-qualified rebate
HEEHRA is funded by IRA section 50122 — $4.5 billion nationally, distributed to state energy offices. Each state designs its rollout; as of April 2026, roughly 40 states have launched or are in active pilot.
Rebate amounts depend on household income relative to Area Median Income (AMI):
- Households under 80% AMI: up to 100% of project cost covered, $8,000 max for heat pumps
- Households 80–150% AMI: up to 50% of project cost, $4,000 max for heat pumps
- Households over 150% AMI: NOT eligible for HEEHRA, but fully eligible for §25C
- Additional HEEHRA allocations: $1,750 heat pump water heater, $840 electric cooktop/oven, $1,600 insulation/air sealing, $4,000 electrical panel upgrade
- Whole-home cap: $14,000 per household across all HEEHRA categories
Income eligibility: how AMI is calculated
AMI is set annually by HUD at the metropolitan statistical area level. As of 2026 in major metros, 80% AMI for a family of four is roughly:
- New York, NY: $119,000 (80% AMI, family of 4)
- San Francisco, CA: $149,000
- Seattle, WA: $119,000
- Portland, OR: $83,000
- Atlanta, GA: $70,000
- Chicago, IL: $82,000
- Dallas-Fort Worth, TX: $77,000
- Phoenix, AZ: $72,000
Stacking: which incentives combine
Per IRS Notice 2024-13, §25C and HEEHRA can be claimed on the same project, but with a twist: the 30% §25C calculation is done on the net cost AFTER HEEHRA is applied, not on the sticker price.
Example: $10,000 heat pump for a household at 70% AMI. HEEHRA pays 100% up to $8,000, so HEEHRA covers $8,000. Remaining cost: $2,000. §25C pays 30% of $2,000 = $600. Total incentives: $8,600. Net cost to homeowner: $1,400.
State and utility rebates typically stack on top of both (different funding source), further reducing cost. Example with WA or OR: add a $2,500 utility heat-pump rebate and the net cost on that same $10,000 install drops under $0 — the homeowner is paid to take the equipment.
How to claim §25C on your tax return
Six-step process:
- 1. Keep all documentation: itemized invoice, manufacturer certification statement, AHRI certificate, proof of ENERGY STAR cold-climate certification if applicable
- 2. Confirm equipment meets CEE Highest Efficiency Tier at cee1.org
- 3. Complete IRS Form 5695 (Residential Energy Credits), Part II for heat pumps
- 4. Enter the credit amount on Schedule 3, then Form 1040
- 5. File electronically via IRS Free File, commercial tax software, or a CPA
- 6. Retain records for 3 years in case of audit — manufacturer cert, invoice, AHRI cert
How to apply for HEEHRA
HEEHRA is state-administered, so the process varies — but the core steps are similar:
- Find your state's energy office HEEHRA portal (e.g. WA Dept of Commerce, Oregon DOE, NYSERDA in NY, CEC in California)
- Verify income eligibility — most states use a self-attestation form plus prior-year tax return
- Get quotes from HEEHRA-approved contractors (approved-installer list maintained by state)
- Submit rebate pre-authorization (in most states, required before install)
- Contractor applies the rebate as a point-of-sale discount
- Retain receipts; no separate IRS filing needed for HEEHRA (it's not a tax credit)
- If your state hasn't launched HEEHRA yet as of your install date, §25C-only is available — you can't retroactively claim HEEHRA after install