Awash in savings

Tax changes can make the upgrade to a heat pump water heater more affordable

Posted on May 24 2023 in Energy
Dog in tub

By Joe Spear

A home upgrade that lowers the cost to heat your water may also help you save on your taxes next year.

The Inflation Reduction Act, passed by Congress last year, includes incentives for homeowners to make qualifying energy efficiency upgrades. The act includes a tax credit to upgrade to a heat pump water heater (HPWH), and according to the ENERGY STAR® website (, the tax credit can be up to 30% of the project cost with a $2,000 maximum credit amount. Heat pump water heaters that have earned the ENERGY STAR are eligible for the credit.

Heat pump water heaters are two to three times as efficient as conventional electric resistance water heaters, according to the U.S. Department of Energy. HPWHs use refrigerant to move heat from the surrounding air to the water within the tank. This improves efficiency and costs you less to produce hot water. Using less energy also helps reduce carbon emissions, benefiting the environment.  

Heat pumps can help cool and dehumidify the surrounding space in the summer. During the summer months, the heat pump will draw heat from nearby air to help warm the water. This can help lower the temperature in the surrounding area, making the space more comfortable. They also dehumidify the air! If you are already running a dehumidifier in the basement, an HPWH can do that job while heating your water.

Location matters.Where an HPWH is installed can impact its overall performance. ENERGY STAR recommends installing HPWHs in unconditioned or semi-conditioned interior spaces where temperatures remain above 50 degrees Fahrenheit for most of the year. ENERGY STAR also recommends avoiding placing the HPWH in garages or outdoors where it can be consistently subjected to freezing temperatures.

Don’t forget potential rebates. An ENERGY STAR-certified HPWH can save more than $400 annually in energy costs for a family of four. Your local electric cooperative may even offer rebates for qualifying HPWHs. You may also be eligible for the federal tax credit, though that may depend on your total tax liability. Contact your tax advisor for details and to determine eligibility for the full available tax credit.

If your water heater is close to 10 years old (or older), you should start considering a replacement. A variety of options exist, including heat pump water heaters, to improve your home’s energy use. Contact your local electric cooperative’s energy advisor to discuss options. 

JOE SPEAR is energy advisor at White County REMC in Monticello and Delphi, Indiana.