What is the Geothermal Federal Tax Credit?
You may have heard about the recent positive changes to the geothermal federal tax credit making clean energy geothermal more affordable to you. The recent passing of the Inflation Reduction Act (IRA) 2022 means that the geothermal federal tax credit has increased from 26% to 30% until 2032, with a step-down plan through 2034. Read below for a summary of the updated tax credit rates for residential and commercial geothermal installations and a summary of how to apply for the tax credit.
The bill extends the credit for residential installations at the following rates:
- 2022-2032 - 30%
- 2033 - 26%
- 2034 - 22%
The commercial tax credit is extended under a two-tier structure:
- A "base rate" of 6% (or 1/5 of the bonus rate)
- A "bonus rate" of 30%
- An additional “Domestic Content Bonus” of 10% for US-made products, which Enertech products qualify for (certain labor requirements may need to be met to qualify for the domestic content bonus)
8 Things to Know about Qualifying for the Geothermal Federal Tax Credit
The geothermal heat pump, also known as the ground source heat pump, must meet Energy Star requirements upon installation finalization to qualify for the federal tax credit. Almost all Enertech-manufactured geothermal heat pumps are Energy Star certified and far exceed Energy Star Requirements. Please confirm with your installer that your heat pump is eligible for the tax credit prior to installation.
The unit must be installed in a home that is in the US. The home must also be your “principal residence." You can use the tax credit multiple times if you install geothermal in more than one home or building. Secondary homes, vacation homes, condos, duplexes, mobile homes, etc., all qualify for the federal tax credit. Military service, vacation, education, business, circumstances such as illness, etc., will not change your principal residence. Ask your tax professional if you are installing geothermal in more than one building to see if you qualify for the tax credit for multiple installations.
You can claim the tax credit for both existing homes/retrofit and new construction.
The geothermal system will not qualify for the tax credit if used solely for heating hot tubs or pools.
The geothermal system must be “placed in service” or efficiently running after installation prior to applying for the year’s tax credit.
Products used solely for rental properties will not qualify for the tax credit. The tax credit is only available for your principal residence(s). However, if your principal residence is also rented out, you could receive a percentage of the geothermal tax credit. More details on this are included in Section 25C€ (2) Joint ownership of energy items on the IRS form. Please seek assistance from a tax advisor to determine your eligibility.
The tax credit is not refundable in many cases. The credit can be carried forward for a maximum of ten years.
The geothermal tax credit covers expenses associated with ground source heat pumps. This may include onsite preparation, equipment, assembly, and necessary piping or wiring used when connecting the system to the home. When determining the total cost of the geothermal system, you can include all covered products, labor if you did not do the labor yourself, and sales tax. Ductwork, radiant flooring, or additional add-on components are not eligible for the federal tax credit.
How to Apply for the Geothermal Federal Tax Credit
Before installation, make sure your geothermal heat pump will qualify for the tax credit. Once the geothermal system is placed in service, fill out form 5695 to include with your federal taxes. Form 5695 is split into two parts, the Residential Energy Efficient Property Credit and the Nonbusiness Energy Property Credit. You only need to fill out the part relating to your project and the type of credit you are eligible to claim. In order to complete the form, you will need to know exactly how much was spent on your geothermal system and installation. Form 5695 can be found at the link below. We recommend using a tax professional for assistance.
- Form 5695
- Form 5695 Instructions
- IRS Phone Number 1-800-829-1040
The federal tax credit makes geothermal systems more affordable than ever before to US citizens. Click here to learn more about the flexible financing options that are available to you as well. Additional state or provincial incentives can bring the cost of installation down even further. We recommend utilizing www.dsireusa.org and checking the database for state incentives to maximize your savings. You can also talk to your local tax professional or geothermal installer to see how you can maximize savings and offset the cost of geothermal even more. We would love to hear from you if you have any questions or want to know more about geothermal in your home.