Heat Pump Tax Credits in 2026: What Changed After 2025

What Happened to the Federal Heat Pump Tax Credit

If you're shopping for a heat pump in 2026, the single biggest change you need to understand is this: the federal tax credits that once covered a significant portion of your heat pump purchase are gone. Both Section 25D (the Residential Clean Energy Credit) and Section 25C (the Energy Efficient Home Improvement Credit) expired on December 31, 2025, under the One Big Beautiful Bill Act (OBBBA).

Section 25C previously offered homeowners up to $2,000 per year for qualifying heat pump installations. Section 25D covered 30% of the total installed cost with no annual cap. Neither credit is available for 2026 tax filings. If you buy a heat pump with cash or take out a loan to finance the purchase, you will receive $0 in federal tax credits.

This is a massive shift. A homeowner in Massachusetts who installed a $14,000 heat pump system in 2024 could claim $2,000 under 25C or up to $4,200 under 25D. That same homeowner installing the identical system in 2026 gets nothing from Washington. The federal government is completely out of the residential heat pump incentive game for homeowner-purchased systems.

Why the Federal Credits Expired

The Inflation Reduction Act of 2022 originally extended and expanded residential clean energy tax credits through 2032. However, the One Big Beautiful Bill Act (OBBBA), signed into law in late 2025, repealed these provisions as part of a broader restructuring of the tax code. The rationale was that states had built robust incentive programs of their own, and federal subsidies were duplicative.

Whatever the political reasoning, the practical impact is clear: homeowners can no longer rely on the IRS to offset part of their heat pump investment. This makes understanding state and utility programs far more important than it was even 12 months ago. It also changes the math on when to buy — because state programs have funding caps that federal tax credits never had.

Many contractors and online resources are still advertising the federal credit. If you see a quote that includes "30% federal tax credit" or "$2,000 federal rebate," that information is outdated. Walk away from any installer who factors a dead credit into your savings estimate. It's either dishonest or a sign they aren't keeping up with the regulatory landscape.

State Incentives: Your Primary Savings Source

The good news is that state-level heat pump programs remain active, well-funded, and in many cases more generous than they were a year ago. Several states increased their rebate budgets specifically to compensate for the loss of federal credits. The incentive landscape across the NuWatt service area ranges from $450 in Pennsylvania to $11,500 in Rhode Island — a striking range that underscores why your state matters more than ever.

Here is the current state of play for every state NuWatt serves:

Notice the disparity. A Rhode Island homeowner replacing an oil boiler with a cold-climate heat pump can receive $11,500 from Clean Heat RI — covering roughly 85% of a typical $13,500 installation. A Pennsylvania homeowner doing the exact same project gets $450, covering about 3.6%. This is why understanding your state's program is not optional — it's the difference between a 1-year payback and an 8-year payback.

HEAR Rebates: Additional Federal Funding

The High-Efficiency Electric Home Rebate Act (HEAR) is a separate pot of federal funding that operates differently from the expired tax credits. Rather than flowing through the IRS as a tax deduction, HEAR rebates are administered by state energy offices as point-of-sale discounts. This means you see the savings on your invoice, not 12 months later on your tax return.

HEAR is specifically designed for income-eligible households — generally those earning up to 150% of the Area Median Income (AMI). The maximum HEAR benefit is $8,000 for a heat pump, though actual amounts vary by state and household income. Several states in the NuWatt service area are actively launching or expanding their HEAR programs in 2026:

The critical thing to understand about HEAR is that you do not apply for it on your tax return. Your installer or state energy office handles the paperwork, and the discount appears on your final invoice. If you think you might qualify based on income, ask your installer about HEAR eligibility before signing any contracts.

Third-Party Owned Systems: The 30% Loophole

Here is a nuance that most homeowners and even many contractors don't fully understand: while homeowner-purchased systems get $0 in federal credits, third-party owned systems still qualify for the 30% Investment Tax Credit (ITC) under Section 48/48E. This is the same mechanism that solar leases and power purchase agreements (PPAs) use.

In a third-party ownership arrangement, a company owns the heat pump equipment installed in your home. You pay them a monthly fee (like a lease) or a per-unit energy payment (like a PPA). Because the company — not you — owns the equipment, they can claim the 30% ITC. They then pass a portion of that savings through to you in the form of lower monthly payments.

This model is more common with solar panels, but it's emerging in the heat pump market. If you're in a state with low rebates (like Pennsylvania or Texas) and your upfront budget is tight, a third-party ownership arrangement might reduce your out-of-pocket cost. However, you won't own the equipment, and long-term costs may be higher than buying outright. Always compare the total cost of ownership over 15 years before committing to a lease.

Common Mistakes Homeowners Make in 2026

The transition away from federal credits has created a lot of confusion. Here are the most common mistakes we see homeowners making:

What You Should Do in 2026

The loss of federal credits does not mean heat pumps are a bad investment. In most of the NuWatt service area, the economics remain strong because of generous state programs and high fuel oil prices. Here is a practical step-by-step plan:

See our state-by-state rebates guide →

How NuWatt Helps You Navigate the New Incentive Landscape

At NuWatt, we updated all of our quoting systems on January 1, 2026, the day the federal credits expired. Every quote we provide reflects the actual incentives available to you — no inflated savings, no phantom credits, no bait-and-switch. We handle all state rebate applications as part of our installation service, and we actively monitor HEAR rollout timelines so we can apply on your behalf the moment funding becomes available.

If you're in Massachusetts, Rhode Island, Connecticut, New Hampshire, Vermont, Maine, New Jersey, Pennsylvania, New York, or Texas, we can give you a same-day estimate that shows your gross cost, applicable state rebates, potential HEAR savings, and your true net cost. No guesswork, no dead credits, no surprises at tax time.