Geothermal Heat Pump Terminology:
EER – Energy Efficiency Ratio
COP – Coefficient of Performance
ISO Standard 13256- 1 or the Air Conditioning and Refrigeration Institute (ARI) Standard 870 for ground-loop heat pumps. *Tax Credit includes installation costs.
Is there a federal geothermal tax credit for geothermal heat pumps?
Yes, geothermal heat pumps qualify for a 26% federal geothermal tax credit
How much:
26% of the cost (including installation/labor costs), with no upper limit.
Timing:
The tax credit is in effect through 2023 † . The geothermal heating and cooling system must be installed in a home that you own and use as a residence (rentals don’t qualify as residential properties; however second homes do qualify) between January 1, 2009 and December 31, 2023 † .
† Recently extended through December 31, 2023
Details:
Your geothermal heating and air conditioning system must meet the requirements of the ENERGY STAR® program which are in effect at the time that the expenditure for such equipment is made.
What are the ENERGY STAR requirements for geothermal heat pumps?
The current ENERGY STAR requirements for geothermal heat pumps can be found on ENERGY STAR®’s website: Federal Tax Credits – Geothermal Heat Pumps
Find qualified models:
- All ENERGY STAR® qualified geothermal heat pumps are eligible for the tax credit:
- ENERGY STAR® Qualified Product List is published on EnergyStar.gov How to apply:
- File 2020 IRS Form 5695 with your tax return.
Does a geothermal heat pump have to include a water heater to qualify for the 26% federal geothermal tax credit?
Beginning December 1, 2009 a geothermal heat pump DOES NOT have to include water heating to qualify for the tax credit. Before December 1, 2009 a geothermal heat pump DOES have to include water heating to qualify for the tax credit.
In order for a geothermal heat pump to qualify for the tax credit, the unit must meet ENERGY STAR® requirements. The ENERGY STAR® requirements changed on December 1, 2009. The requirements in effect prior to December 1, 2009, required some or all of the domestic water heating be provided through the use of:
a desuperheater an integrated demand water heater or a separately installed compressor that provides demand for water heating. On December 1, 2009, a new ENERGY STAR® geothermal heat pump specification was released which removed this requirement.
Which products are eligible for the 26% federal tax credit with energy-efficient home improvements? Are they available for new homes? How about vacation homes and rental properties?
Tax credits are available at 26% of the cost, with no upper limit, through 2021 † (for existing homes & new construction – it does not have to be your “principal residence,” vacation homes are eligible, see this FAQ on rentals) for:
- Geothermal Heat Pumps
- Solar Panels
- Solar Water Heaters
- Small Wind Energy Systems
Improvements not affected by the $1,500 cap (and in effect through 2021) include:
- Geothermal Heat Pumps
- Solar Water Heaters
- Solar Energy Systems
- Small Wind Energy Systems
- Fuel Cells (up to $500 per .5 kW of power capacity)
You can get both the 26% tax credit (up to $1,500) and the 26% tax credit (with no upper limit). For example, you could replace your windows and get $1,500, and purchase a new geothermal heat pump and get an additional 26% tax credit (with no upper limit). However, these are non-refundable tax credits, so you can’t get more back in tax credits than you pay in federal income tax . The tax credits that are not limited to the $1,500 cap can be carried forward to future years.
Even if you received the full $500 for the tax credits back in 2006 or 2007, you are still eligible for the full $1,500 in 2009 and 2010.
What parts of a geothermal heat pump are covered by the tax credit?
The majority of the geothermal heat pump property and it’s installation is covered by the 26% tax credit. All geothermal heat pump components certified by the manufacturer in the “Manufacturer Certification Statement” will be covered. There may be some add on components that will not be covered such as an emergency back up system and the ducts. These components are not directly related to the efficiency of the covered geothermal heat pump property.
IRS Guidance: Notice 2009-41 Section 3. (1)(e) Qualified geothermal heat pump property expenditures are expenditures for equipment which 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, meets the requirements of the ENERGY STAR® program which are in effect at the time that the expenditure for such equipment is actually made (even if under § 25D(e)(8) the expenditure is deemed made at a later time for purposes of determining the taxable year for which a taxpayer may claim the credit), and is installed on or in connection with a qualifying dwelling unit.
Are installation costs covered by the Federal Geothermal Tax Credits?
Installation costs ARE COVERED for:
- HVAC (Heating, Ventilation and Air Conditioning)
systems
- Biomass Stoves
- Water Heaters (including solar)
- Solar Panels
- Geothermal Heat Pumps
- Wind Energy Systems
- Fuel Cells
The tax credit for HVAC, biomass stoves, and non-solar water heaters is 26% of the total cost (product + installation) up to $1,500. The law specifies installation costs include: “expenditures for labor costs properly allocable to the onsite preparation, assembly, or original installation of the property.”
I am building a new home, can I qualify for any of the tax credits?
A 26% federal geothermal tax credit (including labor and installation), with no upper limit, is available for consumers building new homes (through 2021) for Geothermal Heat Pumps.
The credit for photovoltaic, solar water heaters, geothermal heat pumps, and small wind energy systems does not have to be for your principal residence; so, rental units, second homes, etc… are all eligible. See the Instructions attached to 2020 IRS Form 5695 to help you further with this provision.
Are vacation homes or second homes eligible for the tax credits?
The only products that are eligible for vacation or second homes for the tax credit are:
- Geothermal Heat Pumps
- Solar Panels
- Solar Water Heater
- Small Wind Energy Systems
- Tax credits are available at 26% of the cost, with no upper limit, through 2021 † for these products.
What is the history of the 26% federal geothermal tax credit?
The Energy Policy Act (EPACT) of 2005 first established the energy efficiency tax credits that were effective in 2006 & 2007. The majority of these tax credits were for 10% of the cost, up to $500.
On October 3, 2008 President Bush signed the Emergency Economic Stabilization Act of 2008 (also known as the “Bailout Bill”) to put many of the tax credits back in place for 2009. There were no provisions made to cover expenditures in 2008.
On February 17, 2009, President Obama signed the American Recovery and Reinvestment Act of 2009 (ARRA) that made significant changes to the energy efficiency tax credits. The highlights are:
The tax credit was raised from 10% to 30%.
The maximum credit was raised from $500 to $1,500 total for the two year period (2009-2010). However, some improvements such as geothermal heat pumps, solar water heaters, and solar panels are not subject to the $1,500 maximum.
The tax credits that were previously effective for 2009, were extended to 2010 as well.
Previously the 26% federal geothermal tax credit was extended through December 31, 2020; however, it has now been extended through December 31st, 2023!
Geothermal ground source heat pump costs will only have an incentive boost of reducing the effective price of the installed ground source heat pump system of 22% after January 1st, 2024.
Go Green. Go Geothermal!
![[Image: Earth River Geothermal - Geothermal Heating and Cooling - Annapolis, Maryland]](https://earthrivergeothermal.com/wp-content/uploads/2017/05/shutterstock_146949359-1.jpg)
