Switching to a Heat Pump: Costs, Rebates, and Honest Tradeoffs

Two things have changed, and most of what you will read online has not caught up with either. The federal tax credit that paid 30 percent of a heat pump installation up to 2,000 dollars is gone. And at current national average energy prices, a typical heat pump costs more to run than a modern gas furnace, not less. Both statements are uncomfortable and both are checkable, so let us do the checking.

None of that means a heat pump is a bad decision. It means the decision now turns almost entirely on two local numbers: what you pay per kilowatt-hour, and what you pay per therm of gas. This article gives you the arithmetic to run those numbers yourself.

The federal tax credit, precisely

The Energy Efficient Home Improvement Credit under section 25C of the tax code offered 30 percent of project cost with a 2,000 dollar annual cap for qualifying heat pumps and heat pump water heaters. ENERGY STAR describes that credit as effective for products purchased and installed between January 1, 2023, and December 31, 2025.

It has ended. Public Law 119-21, enacted July 4, 2025, terminated it. The IRS, in its published questions and answers on that law, states that for section 25C the credit will not be allowed for any property placed in service after December 31, 2025. The IRS Instructions for Form 5695 put it plainly: you cannot claim energy efficient home improvement credits for expenditures or property placed in service after December 31, 2025.

The companion Residential Clean Energy Credit under section 25D, which covered geothermal heat pumps at 30 percent with no cap, ended on the same date.

If a contractor quotes you a price after the federal credit in 2026, they are either behind or are hoping you are. There is no federal homeowner tax credit for a heat pump installed in 2026.

What is left

State programmes and utility rebates continue, and they are now the whole of the incentive picture for most households. They vary enormously and some are oversubscribed, so check your own utility and state energy office rather than a national list.

The federally funded Home Electrification and Appliance Rebates programme, administered by states with Department of Energy money, still exists but has been narrowed. DOE issued updated Home Energy Rebates guidance on May 29, 2026 that eliminated fuel-switching rebates, restricting the programme to upgrades from existing electric equipment to more efficient electric equipment. In other words, the federal rebate that was specifically designed to help people move off gas no longer does that. If you heat with electric resistance and want a heat pump, your state programme may still help. If you heat with gas, that particular door is closed.

Equipment cost, from a source that publishes its numbers

The Energy Information Administration’s report Updated Buildings Sector Appliance and Equipment Costs and Efficiencies, published March 2023 using a 2022 base year, gives typical total installed costs for residential equipment. For a 36 thousand Btu per hour split-system air-source heat pump, the typical installed cost is 6,880 dollars. For a typical gas furnace it is 4,130 dollars. For a typical central air conditioner of the same capacity it is in the range of 5,320 to 5,390 dollars depending on region.

Those are 2022 dollars and your quote will be higher. But the ratio is the useful part, and it points somewhere most coverage misses. If you are replacing both a furnace and a central air conditioner, the pair comes to roughly 9,500 dollars on those figures against 6,880 for a single heat pump that does both jobs. In that situation the heat pump is the cheaper installation. If you are replacing only a furnace and your air conditioner is fine, the heat pump is the more expensive installation. This is the single biggest determinant of whether the economics work, and it has nothing to do with efficiency.

The running cost arithmetic

This is the part nobody shows you. It is not complicated.

The EIA’s September 2026 Short-Term Energy Outlook forecasts a 2026 US average residential electricity price of 18.20 cents per kilowatt-hour and a 2026 US average residential natural gas price of 15.93 dollars per thousand cubic feet. A thousand cubic feet is about 10.37 therms, so that gas price is about 1.54 dollars per therm.

Compare fuels on the cost of a million Btu of heat actually delivered into the house, which accounts for efficiency. One million Btu is 293.1 kilowatt-hours, or 10 therms. Heat pump efficiency is expressed as coefficient of performance, or COP: units of heat delivered per unit of energy consumed.

Read that table carefully. At national average 2026 prices, a heat pump beats electric resistance by a wide margin at any plausible COP. Against a 95 percent gas furnace it loses unless its seasonal COP exceeds roughly 3.3, which is above what most installed systems achieve over a full heating season in a cold climate.

The break-even rule

Here is the decision rule, which works for any local prices. Take your electricity price in cents per kilowatt-hour, multiply by 0.29, multiply by your furnace efficiency as a decimal, and divide by your gas price in dollars per therm. The result is the seasonal COP your heat pump must exceed to be cheaper to run than that furnace.

Both prices are on your bills. Take fifteen minutes and get them, including delivery and fixed charges divided across your actual usage, because the commodity rate alone understates what you pay.

Two worked paybacks

Assume a house that needs 50 million Btu of delivered heat over a heating season. That is an illustrative figure, not a measurement; substitute your own if you know it.

Case one, replacing electric resistance heat. Resistance heating costs 50 times 53.34, or about 2,667 dollars a year. A cold-climate heat pump at seasonal COP 2.4 costs 50 times 22.23, or about 1,111 dollars. The saving is roughly 1,556 dollars a year. Against the EIA typical installed cost of 6,880 dollars, simple payback is about 4.4 years, and you get central air conditioning you did not previously have. Any state or utility rebate shortens this further. This is the strong case, and it is the case federal policy still supports.

Case two, replacing a 95 percent gas furnace at national average prices. The furnace costs 50 times 16.17, or about 809 dollars a year. The same heat pump costs about 1,111 dollars. The heat pump costs roughly 303 dollars a year more to run. There is no payback on heating alone, at any installed price. The honest answer here is that the case has to be made on something else: replacing a dying air conditioner at the same time, a state rebate large enough to matter, a local electricity-to-gas price ratio better than the national average, or a decision about emissions that you are choosing to pay for.

Cold climates, backup heat, and what the ratings do not tell you

Cold-climate heat pumps are real and they work. The ENERGY STAR Cold Climate designation for ducted split systems requires HSPF2 of at least 8.1, a coefficient of performance of at least 1.75 at 5 degrees Fahrenheit, and heating capacity at 5 degrees of at least 70 percent of capacity at 47 degrees. The Department of Energy’s Residential Cold Climate Heat Pump Challenge, with eight manufacturers participating, set targets of a minimum COP of 2.1 to 2.4 at 5 degrees Fahrenheit and full capacity retention from 47 degrees down to 5 degrees.

Three caveats matter.

• Capacity falls even when efficiency holds. A unit sized for a mild day may not keep up on the coldest one. The fix is backup heat, usually electric resistance strips, which run at COP 1.0. Every hour of strip heat is bought at 53.34 dollars per million Btu at national average prices. A badly configured control strategy that brings strips on early will quietly destroy the economics.
• Defrost cycles cost energy and are not fully reflected in casual comparisons. Seasonal COP in service is usually below what the nameplate suggests.
• Ratings are laboratory figures. HSPF2 is measured under a standard regional profile. Your house, ductwork, sizing, and installer quality will move the real number, almost always downward.

In a cold climate with gas already at the house, a dual-fuel system, heat pump plus the existing gas furnace as backup, is often the rational compromise: the heat pump handles mild hours where its COP is high, the furnace handles the cold tail. It costs more to install and it does not let you remove the gas connection.

What the broader research says, and what it leaves out

The National Renewable Energy Laboratory’s study Heat pumps for all? Distributions of the costs and benefits of residential air-source heat pumps in the United States, published in Joule in February 2024, found that 62 to 95 percent of US households would see reduced energy bills from a heat pump depending on unit efficiency, rising to 82 to 97 percent when paired with weatherisation, with home energy consumption falling 31 to 47 percent on average.

Note the other end of that range. Between 5 and 38 percent of households would not see bill reductions, and the study is clear that installed cost remains a barrier for millions more. The national headline is favourable. Whether you personally are in the favourable group is decided by your two local prices and by what you are replacing.

Where these figures come from

• US Energy Information Administration, Short-Term Energy Outlook, September 2026
• US Energy Information Administration, Updated Buildings Sector Appliance and Equipment Costs and Efficiencies, March 2023
• Internal Revenue Service, Instructions for Form 5695, and IRS questions and answers on Public Law 119-21
• ENERGY STAR, Air Source Heat Pumps Tax Credit page, and Heat Pump Equipment Key Product Criteria
• US Department of Energy, Home Energy Rebates Program Notice 26-2, May 29, 2026
• US Department of Energy, Residential Cold Climate Heat Pump Technology Challenge
• National Renewable Energy Laboratory, Heat pumps for all?, Joule, February 2024

The strongest version of the heat pump case in 2026 is narrower than it was two years ago and narrower than the marketing suggests. If you heat with electricity, propane, or oil, the arithmetic is usually straightforward and favourable. If you heat with natural gas and your air conditioner still works, run the break-even calculation before you sign anything, and be prepared for it to tell you to wait.

General information, current as of September 2026, and not personalised advice.