A 20-year-old federal tax incentive for HVAC equipment and building upgrades that increase energy efficiency in the home is in its final months.
The Energy Efficient Home Improvement Tax Credit — known as 25C for its place in the tax code — sunsets at the end of the year under the One Big Beautiful Bill Act, which passed both houses of Congress earlier this month and was signed into law by President Donald Trump on the Fourth of July.
“We’re disappointed that they’re (incentives) going away,” said Francis Dietz, vice president of public affairs at AHRI. “I don’t think we’re surprised, really, but we’re disappointed. They were moving the energy-efficiency ball forward.”
The Energy Efficient Home Improvement Tax Credit was introduced with the Energy Policy Act of 2005. Enhanced by the Inflation Reduction Act (IRA) of 2022, 25C can be claimed for a range of high-efficiency HVAC products and energy-saving home improvements. The annual limit is $1,200 for most qualified products and improvements, but heat pumps are in a separate category and earn a $2,000 credit. That credit can be combined with credits for other eligible items, meaning a credit of up to $3,200 for a household investing in a heat pump and other improvements.
The IRA’s rebate programs for home energy efficiency, which are being managed by individual states and territories, are separate and were not affected by the Big Beautiful Bill.
More than 2.3 million households claimed a 25C credit in 2023, the year the IRA enhancements kicked in, and nearly 268,000 of those claims included an electric or natural gas heat pump, according to the U.S. Department of Treasury.
The loss of 25C is certain to affect the market for residential heat pumps, but supporters of electrification are hoping the impact is minimal and that states and utilities will step up their incentive programs.
“The long-term trajectory still points toward electrification,” said Ari Matusiak, founder and CEO of Rewiring America, a nonprofit electrification advocacy organization. “Heat pumps remain the most efficient and climate-resilient option on the market, and growing awareness, rising fuel prices, and expanding state-level programs will continue to drive adoption. The market is maturing, contractors are gearing up, and manufacturers have made clear this is the future. But there’s no denying that without federal incentives like 25C, we’re denying more households the better option.”
David Rames, senior product manager at heat pump manufacturer Midea America Corp., said heat pumps have been gaining in popularity for years and that he expects the trend to continue. Heat pumps have outsold gas furnaces in the U.S. every year since 2022, he noted.
“We’re not looking back,” Rames said. “So the trend is good, the trend is positive.”
While the market trend for heat pumps has been driven in part by incentives, the technological advancements that have improved the ability of heat pumps to heat homes in cold climates have also played a big role, Rames said.
“Manufacturers have really invested into their cold-climate heat-pump technology,” he said. “And it’s up to us. … A lot of this is getting the word out that now heat pumps can be installed in the North, because for many, many, many years, as long as I’ve been doing this, heat pumps (were) just for the South. … But that’s not true anymore.”
Dietz agreed with that assessment. “As heat pumps get better in terms of colder temperatures,” the market will see more sales, he said.
At heat pump company METUS (Mitsubishi Electric Trane HVAC U.S.), Dana Fischer, senior director of regulatory strategy, said the “vast majority” of its products qualified for 25C credits in 2023 and 2024. “We know that contractors in our network use the federal income tax credits as part of their sales pitch,” Fischer said.
Fischer said he expects he expects heat pump sales to increase during the remainder of this year as homeowners take advantage of 25C before it expires.
“In future years, we will leverage utility and state rebates to encourage installation of the highest-performance heat pumps that deliver personal comfort and efficiency in all regions and all seasons,” Fischer said.
Rames said the loss of 25C could lead to an increase in electrification incentives that come from utility companies.
“So I would say that it would put a little more pressure on the local utility providers to help offset that (loss), and I’m sure they would be more than happy to do that, if they can come up with the funding,” he said. “But we have to continue to incentivize people to make the right decision, and that right decision is heat pumps.”
Senior managing editor Maria Taylor contributed to this story.