What to Know About the 2023 Geothermal Tax Credit

If you’re considering installing a geothermal system in your home, 2023 might just be the perfect year to do so. Thanks to the Inflation Reduction Act (IRA) of 2022, the federal government has increased the tax credit for geothermal system installation from 26 percent to 30 percent, starting on January 1st of 2023. Here are the key details to keep in mind about the geothermal tax credit for 2023:
  • The tax credit increase was announced as part of the Inflation Reduction Act (IRA) of 2022
  • The increased tax credit is specifically for geothermal system installation in residential homes
  • The new tax credit of 30 percent will be valid from January 1st, 2023 until December 31st, 2032
  • Starting in 2033, the tax credit will slowly decline until it expires completely on December 31st, 2034
  • So, what does this mean for homeowners? If you’ve been considering installing a geothermal system to heat and cool your home, waiting until 2023 to do so could provide a significant financial benefit. With a 30 percent tax credit, the upfront cost of installation will be more manageable, and you can start reaping the benefits of a more energy-efficient home right away. Just be sure to take advantage of the tax credit before it starts to decline in 2033.
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    Understanding the Geothermal Tax Credit

    The Geothermal Tax Credit provides a federal tax credit to homeowners who install geothermal systems in their residential properties. The credit is intended to incentivize the use of renewable energy sources and reduce reliance on non-renewable energy sources. In the Inflation Reduction Act (IRA) of 2022, the tax credit for geothermal systems was increased from 26 percent to 30 percent effective January 1, 2023. This increase reflects the federal government’s commitment to encouraging homeowners to invest in energy-efficient and environmentally friendly heating and cooling systems.

    Benefits of Installing a Geothermal System in Your Home

    Geothermal systems have many benefits for homeowners, including energy efficiency, environmental sustainability, and long-term savings. Geothermal heat pumps are one of the most energy-efficient heating and cooling systems available as they use the Earth’s constant temperature to heat and cool homes. This results in lower energy bills and a more environmentally friendly home heating and cooling system. Additionally, geothermal systems typically require less maintenance than traditional heating and cooling systems, reducing ongoing costs. Installing a geothermal system in your home can also increase the value of your property. As more and more homeowners look for energy-efficient and eco-friendly homes, investing in geothermal technology can be an attractive selling point. Finally, installing a geothermal system can be a way to reduce your carbon footprint and contribute to a cleaner environment.

    How to Qualify for the Geothermal Tax Credit

    To qualify for the geothermal tax credit, homeowners must meet certain criteria. The system must:
    • Be installed in a primary residence.
    • Be placed into service between January 1, 2023, and December 31, 2031.
    • Have a Coefficient of Performance (COP) of at least 3.5.
    • Be certified by the Energy Star program or the National Renewable Energy Laboratory.
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    Homeowners should consult a qualified HVAC professional to determine if their property and existing system meet the requirements.

    The Timeframe for Claiming the Tax Credit

    Homeowners have a limited amount of time to claim the geothermal tax credit. The tax credit is valid until 2032, after which it will begin to phase out gradually until it expires in 2034. Homeowners can claim the tax credit by using IRS Form 5695, Residential Energy Credits, and attaching it to their annual tax return.

    Installation Costs and How the Tax Credit Helps

    The initial cost of installing a geothermal system can be higher than that of traditional heating and cooling systems. However, the geothermal tax credit can help offset these costs. Homeowners can claim a tax credit of up to 30 percent of the total cost of installation, including labor and materials, up to a maximum credit of $1,500 per homeowner, per tax year. Homeowners should ensure that they work with a reputable and experienced HVAC contractor to ensure that their geothermal system is installed correctly and that they can take full advantage of the tax credit.

    Long-Term Savings with a Geothermal System

    While the initial costs of installing a geothermal system may be higher than those associated with traditional systems, homeowners can save money in the long run by investing in this type of technology. Geothermal systems have lower operating costs, require less maintenance, and are more efficient than traditional systems, leading to lower energy bills over time. Additionally, the increased value of the property that comes with having an environmentally friendly system can lead to increased resale value, making the investment even more advantageous in the long term.
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    Other Government Incentives for Renewable Energy

    In addition to the geothermal tax credit, the federal government offers a variety of incentives for renewable energy. These include tax credits for solar, wind, and other renewable energy sources. Homeowners interested in exploring these options should consult with a qualified contractor or energy specialist to determine what options are available and most appropriate for their property and energy needs. In conclusion, the geothermal tax credit provides homeowners with an opportunity to both reduce their energy costs and contribute to a more sustainable and environmentally friendly world. By installing a geothermal system and taking advantage of this tax credit offering, homeowners can make a significant investment in both their property and the planet.

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