One of the benefits of installing a geothermal heat pump system in a new or existing home is that most of the equipment and installation costs are eligible for a federal tax credit. The Residential Energy-Efficient Property Credit, sometimes referred to as the § 25D credit, was enacted in 2009 to lessen the costs of installation of energy efficient units.
Available through the end of 2016, this provision provides homeowners with a 30 percent tax credit on the cost of equipment and installation of a geothermal system, also known as a ground-source heat pump, with no cap on the credit. For example, a homeowner who installs a $26,000 geothermal heating system can take 30 percent of the cost of the unit and installation and deduct it from his or her taxes. In this case, the credit would be $7,800 and the actual cost of the new heating system would actually be $18,200.
What kind of geothermal system is eligible for tax credits?
The tax credit can be claimed on the installation and cost of “Qualified Geothermal Heat Pump Property” installed in a new or existing home in the United States. The home must be a residence of the taxpayer making the claim, whether it is a primary residence or a second home. “Qualified Geothermal Heat Pump Property” refers to systems that use the ground or ground water as a thermal energy source to heat or cool the home. The geothermal unit does not require direct burning of fossil fuels, but does run on electricity. Therefore, the IRS provision says the unit must meet Energy Star program requirements. The labor costs and most associated materials, such as piping and wiring, may be included, but the cost of installing additional duct work may not.
What parts of a geothermal system are not eligible for tax credits?
As we noted just above, duct work is not eligible for the tax credit, and neither is any kind of emergency heating system you may choose to install. The credit also does not apply on spending for equipment used solely to heat a swimming pool or hot tub. According to the IRS, “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.” In other words, the only parts that may not be covered are add-on components that aren't necessarily required for the system to function.
Applying for the tax credit
The tax credit is claimed when you fill out your annual income tax returns. The claim must be made in the tax year it was installed, so if you installed the unit in July 2015, you will make a claim on the tax return you fill out for the 2015 tax year, which you will likely do in the first few months of 2016. If you fill your taxes out yourself, you will need to use Form 5695, which requires you document the cost of the installation.
There are also a number of state-based tax credits and rebates, including the Massachusetts Clean Energy Center (MassCEC) Clean Heating and Cooling program. This new initiative offers rebates to off-set the cost of installation of renewable heating and cooling technologies in homes in Massachusetts. Homeowners and business owners can claim up to $12,500 on the cost of installation.
The fine print
Like with all tax rebates, there are a few additional provisions you will need to know before applying.
• You can use the heat pump for heating water in the home, but it is not a requirement to qualify.
• This is a nonrefundable personal tax credit. A taxpayer claiming a nonrefundable credit can only use it to decrease or eliminate a tax liability. A taxpayer will not receive a tax refundfor any amount that exceeds the taxpayer’s tax liability for the year.
• 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.