The new tax credits in the IRA, together with the Colorado state tax credits and utility rebates for heat pumps and heat pump water heaters, should help persuade existing homeowners, new home buyers, and builders to consider installing more of this equipment in 2023. Here is a summary of how all of these incentives add up for homes in Colorado.
Under the Inflation Reduction Act (IRA), heat pumps and heat pump water heaters (HPWHs) are eligible for a 30% tax credit, beginning in tax year 2023, up to a limit of $2,000 per taxpayer. (The tax credit applies to the cost of the equipment, not the additional installation costs.)
If the homeowner is income-qualified (less than 150% of AMI), he/she is eligible for a larger rebate on heat pumps and HPWHs, of up to 50% of the equipment costs. These rebates will be determined by the Colorado Energy Office (CEO), and they will likely not be available until early 2024. These low-income equipment rebates are in addition to the 30% tax credits but cannot be combined with the “HOMES” efficiency rebates (described in the next paragraph).
If the homeowner is doing a comprehensive set of energy efficiency improvements that result in significant overall energy savings, there will be additional rebates of up to $4,000, available through the “Hope for HOMES” section of the IRA. The amount depends on the overall savings, and the specific amounts will be determined by CEO. This would be in addition to the 30% tax credit for heat pumps and HPWHs described above. However, these rebates will also not be available from CEO until early 2024.
In 2022 Colorado also approved tax credits for heat pumps and HPWHs, beginning in the 2023 tax year. The equipment cost is eligible for a 10% state tax credit, and in addition, is exempt from the state sales tax, which is 2.9%.
All the rebates for heat pumps and HPWHs from utilities and local governments in Colorado are listed on Love Electric at: https://loveelectric.org/rebates/. These rebates are in addition to the tax credits and tax exemptions described above.
The example in the table below summarizes how these rebates and tax incentives add up.
Heat Pump system cost
Federal tax credit (30% up to $2,000)
State tax credit plus sales tax exemption (12.9%)
Utility rebate – Tri-State co-op
Total amount of rebates and tax credits
|Efficient, non- cold climate heat pump – $16,000 total ($8,000 for equipment)||$2,000||$1,032||$1,800||$4,832|
The 30% tax credit for heat pumps and HPWHs in the IRA, which applies to the equipment cost as described above, also apply to the buyer of a new home with this equipment.
If the homebuyer is income-qualified (less than 150% of AMI), he/she is eligible for a larger rebate on heat pumps and HPWHs, of up to 50% of the equipment costs (or up to 100% if less than 80% of AMI). These rebates will also be determined by CEO. These low-income equipment rebates are in addition to the 30% tax credits.
In addition, if the new home is Energy Star certified, the developer/builder can receive a tax credit of $2500. For a Department of Energy Zero-Energy Ready home, the developer/builder would receive a tax credit of $5,000.
The homebuyer is also eligible for the state tax credits mentioned above (10% income tax and 2.9% sales tax) for the equipment costs of the heat pump and HPWH in the new home.
Some utilities have additional incentives for efficient and electric new homes, which are summarized here. (Scroll down to “Rebates and Tax Credits for Builders.”)
Most of the utility rebates go to the new home builder, but the federal and state tax credits go to the home buyer. For example, let’s say a new home is built to the requirements of the 2018 IECC and has a 3-ton cold-climate heat pump and HPWH with total equipment costs of $12,000. Assuming the home buyer is not income-qualified, he/she would qualify for a federal tax credit of $2,000 and state tax credit/exemptions of $1,550, for total tax benefits of $3,550. If the home is in a Tri-State Co-op service territory, the builder would also receive a rebate of $2,150 for the heat pump and heat pump water heater.
Love Electric aims to accelerate the adoption of heat pumps, heat pump water heaters, and other efficient electric technologies in homes and businesses across Colorado, to lower consumer energy costs, reduce greenhouse gas emissions, and provide improved health, comfort and other benefits. Love Electric is an initiative of the Beneficial Electrification League of Colorado (BEL-CO).