Geothermal Tax Credit Explanation
Residential Energy-Efficient Property Credit. A 30% tax credit for the installation of a ground source heat pump (geothermal system) with no cap was enacted in 2009. This Tax credit is available through the end of 2016. See an example of geothermal by the numbers including how the tax credit added up.
30% of Entire System - Tax Credit (not deduction)
The Tax Credit may be claimed for spending on 'Qualified Geothermal Heat Pump Property' installed in connection with a new or existing dwelling unit located in the United States and used as a residence by the taxpayer.
'Qualified Geothermal Heat Pump Property' means any equipment which -
1. Uses the ground or ground water as a thermal energy source to heat the dwelling unit or as a thermal energy sink to cool the dwelling unit, and
2. Meets the requirements of the Energy Star program which are in effect at the time the equipment is installed. (Ask your geothermal installer)
Labor costs associated with the installation of the geothermal heat pump property and any associated materials (piping, wiring, etc) are included. The residence does not have to be the primary residence.
Ductwork and emergency heat ineligible for tax credit
Please note that a notice on the IRS website from November 1, 2013, states that the distribution system and emergency heat portions of the system are not covered as part of the federal tax credit. Piping and wiring remain eligible under current guidelines.
In this amended description, the IRS states: “Only the cost of the heat exchange equipment in the ground outside the house can be eligible for the § 25D credit. The costs for the distribution system for the home and a back-up emergency heating or cooling system are not eligible for the credit because they are not incurred for qualified geothermal heat pump property.”
The tax credit can be used to offset both regular income taxes and alternative minimum taxes. If the tax credit exceeds the income tax liability, the remaining balance can be carried forward into future years.
Homeowner spends $26,000 total to install a new geothermal heat pump system in his/her existing home in 2011.
Tax Credit: $26,000 x 30% = $7,800.00. The actual cost the homeowner is $18,200.
State and Local Incentives are available too. Its 35% in North Carolina!
Many states have extra incentives available in addition to the federal 30%. View State & Local Incentives
The credit does not apply on spending for equipment used solely to heat a swimming pool or hot tub.
FAQs About the Geothermal Tax Credit
Will my geothermal heat pump be eligible for the ENERGY STAR?
Yes, heat pumps with the following specifications (provided by ENERGY STAR support) can earn the ENERGY STAR.
- Open Loop: >=3.6 COP; >=16.2 EER
- Closed Loop: >=3.3 COP; >=14.1 EER
- Direct Expansion (DX): >=3.5 COP; >=15 EER
Do a water-to-water geothermal heat pumps qualify for the tax credit?
Yes. Beginning on December 1, 2009, water-to-water geothermal heat pumps are covered by the tax credit. However, the heat pump in question must have been bought on or after December 1, 2009. Water-to-water heat pumps purchased before this date are not covered.
Are all parts of the geothermal heat pump covered by the tax credit?
The tax credit is applied to all of the parts that come with the heat pump, as well as the installation of the heat pump and ground loop. The only parts that may not be covered are add-on components that aren't necessarily required for the system to function and duct work or back up heat.
Is water heating a necessary element of a geothermal heat pump that qualifies for the tax credit?
As of December 1, 2009, no, the heat pump does not have to be used for water heating to qualify.
Is a geothermal heat pump installation in my vacation or second home covered by the tax credit?
In fact, geothermal heat pumps are one of the products that are covered by the tax credit when installed in a vacation or second home, along with solar panels, solar water heaters, and small wind energy systems.
Am I eligible for the tax credit if I'm installing geothermal in a new home?
For many products, the tax credit is only applicable when they're installed in an existing home. However, the tax credit for geothermal heat pumps is applicable for installation in both new and existing homes through 2016.
State Incentives: Find your Geothermal State Tax Credits & Incentives
How to claim the credit:
Use Form 5695 for systems installed since Jan. 2009. For systems completed in 2008, the maximum tax credit is capped at $2,000. For property placed in service after the start 2009, there's no limit on the credit amount. The tax credit can be used to offset both regular income taxes and alternative minimum taxes (AMT). If the federal tax credit exceeds tax liability, the excess amount may be carried forward into future years. Spending on geothermal heat pump property adds to your home's cost basis, but also must be reduced by the amount of the tax credit received.
Always consult with a tax professional for accurate information on this and any tax code.
From the IRS - Link
04. Geothermal Heat Pump Property.
Q-31: A taxpayer contacts a seller to inquire about the installation of a geothermal heat pump to heat his home. The seller/installer informs the taxpayer that the following items must be installed in addition to the geothermal heat pump: heat exchange equipment in the ground outside of the house, a distribution system for the home, and a back-up emergency heating or cooling system. Which of these costs, if any, are eligible for the § 25D credit?
A-31: Only the cost of the heat exchange equipment in the ground outside the house can be eligible for the § 25D credit. The costs for the distribution system for the home and a back-up emergency heating or cooling system are not eligible for the credit because they are not incurred for qualified geothermal heat pump property. Section 25D(d)(5)(B) defines qualified geothermal heat pump property as any equipment that (1) uses the ground or ground water as a thermal energy source to heat the dwelling unit or as a thermal energy sink to cool such dwelling unit, and (2) meets the requirements of the Energy Star program in effect at the time that the expenditure for such equipment is made. Section 25D(e)(1) provides that expenditures for piping and wiring to interconnect qualified property to a dwelling unit are eligible for the § 25D credit. However, nothing in § 25D extends the credit to other auxiliary equipment such as distribution systems within the dwelling un it or backup emergency heating and cooling systems.
Both the § 25C credit and the § 25D credit are nonrefundable personal tax credits. A taxpayer claiming a nonrefundable credit can only use it to decrease or eliminate a tax liability. A taxpayer will not receive a tax refund for any amount that exceeds the taxpayer’s tax liability for the year.
Q-3: May a taxpayer carry forward unused credits to another tax year?
A-3: A taxpayer may carry the § 25D credit forward to future tax years pursuant to § 25D(c).