The 30% geothermal tax credit is a fantastic incentive for homeowners who want to invest in renewable energy. Wondering how it works? Here’s what you need to know:
Overall, the 30% geothermal tax credit is an excellent way for homeowners to invest in renewable energy and save money on their taxes at the same time. With the recent extensions of the credit, there’s never been a better time to consider a GeoThermal system for your home.
Understanding the basics of the geothermal tax credit
The geothermal tax credit is an incentive program designed to encourage homeowners and businesses to invest in renewable energy. This tax credit is part of the Investment Tax Credit (ITC) under the Energy Policy Act of 2005. The ITC provides a tax credit equal to 30 percent of the total cost of a qualifying renewable energy system installed by December 31, 2034.
Geothermal heat pump systems that meet the standards of the Energy STAR program qualify for the geothermal tax credit. This tax credit applies to both residential and commercial properties. The geothermal tax credit is considered a dollar-for-dollar reduction in the amount of tax owed, which means that you can get a substantial reduction in your tax bill if you invest in a geothermal heat pump system.
One significant benefit of geothermal systems is they use the constant temperature of the earth to heat and cool homes and buildings, which reduces the operating costs and carbon footprint. By taking advantage of this tax credit, homeowners and businesses can substantially lower the upfront cost and bring a return on investment much sooner.
Qualifying for the 30% geothermal tax credit
To qualify for the geothermal tax credit, your geothermal heat pump system must meet the following requirements:
- The system must be installed in a taxpayer’s primary residence, a second home or a commercial property.
- The system must meet the requirements of the Energy STAR program.
- The system must be in place and in service by December 31, 2034.
If you purchase a geothermal heat pump system, you are eligible for the tax credit. However, if you lease the system, the owner of the system receives the credit.
Documentation required to claim the geothermal tax credit
To claim the geothermal tax credit, you need to document all the costs related to the installation of your geothermal heat pump system, including equipment costs and labor. You should also obtain a manufacturer’s certification that the equipment meets the Energy Star guidelines, as well as a system performance certificate from the contractor who installed it.
You need to file IRS Form 5695 and attach it to your tax return. Make sure to keep all the receipts and invoices as proof of purchase and installation.
How to calculate the total costs for the geothermal tax credit
The total cost of your qualifying geothermal heat pump system includes all expenses incurred during the installation process, such as drilling, trenching, excavation and any other necessary building modifications required to install the system. You can include the costs of related equipment such as ductwork, wiring, and piping needed to operate the system.
The geothermal tax credit is calculated by multiplying the total cost of the system, including installation and labor, with the tax credit percentage of 30 percent.
Note: There are other energy-related tax credits to take into consideration when looking at the total tax incentives available from renewable energies.
Limitations and restrictions of the geothermal tax credit
There are limitations and restrictions to the geothermal tax credit that you need to consider before you invest in a geothermal heat pump system:
- The system must meet Energy Star requirements
- The system must be placed in service in the current tax year, Dec. 31, 2034.
- The limit of the credit for each property is $2,000 per kilowatt of installed capacity.
- The maximum tax credit for a geothermal system is 30% or less of the total qualifying cost of the system including any labor costs.
- The system must be installed in either a primary residence, a second home or a commercial property.
Tips for maximizing your geothermal tax credit
To maximize your geothermal tax credit, consider the following tips:
- Plan for the installation of your geothermal heat pump system in advance to ensure you have time to complete the installation and claim the tax credit in a timely fashion.
- Work with a contractor with experience in installing geothermal systems that comply with the Energy Star program requirements.
- Keep track of all expenses related to the installation and operation of your geothermal heat pump system and retain all necessary documentation.
- Be aware of the limitations and restrictions associated with the tax credit and plan accordingly.
Frequently asked questions about the geothermal tax credit
Q: Can I take advantage of the geothermal tax credit if I install a geothermal system in my second home or a commercial property?
A: Yes, the geothermal tax credit applies to geothermal systems installed in a taxpayer’s primary residence, a second home or a commercial property.
Q: Can I claim the geothermal tax credit if I lease a geothermal system?
A: No, only the owner of the geothermal system is eligible to claim the tax credit.
Q: Is there a limit on the amount of tax credit I can receive for a geothermal system?
A: Yes, the maximum tax credit for a geothermal system is 30% or less of the total qualifying cost of the system including any labor costs.
