Maximizing Geothermal Geothermal Tax Credits and Incentives
The federal government offers a substantial tax credit for homeowners who install geothermal heat pumps. Under the Inflation Reduction Act of 2022, this tax credit has been extended through 2032, allowing homeowners to claim a 30% tax credit on qualified installation expenses between 2022 and 2032.
Key Points and Eligibility for a Federal Geothermal Tax Credit
- Installation Timing: The system must be installed and operational between January 1, 2022, and December 31, 2032, to qualify for the 30% tax credit. The credit percentage drops to 26% for installations completed in 2033 and 22% for those completed in 2034 before expiring.
- Eligible Costs: The credit covers the cost of the geothermal system, including geothermal heat pumps, labor for installation, and related piping or wiring that connects the system to the home. However, it does not cover systems used solely for heating pools or hot tubs.
- No Cap on Credit Amount: There is no maximum limit to the amount you can claim, allowing homeowners to benefit fully from more extensive or expensive installations.
- System Standards: Geothermal heat pumps must meet ENERGY STAR requirements at the time of installation. Covered costs include the geothermal equipment, labor for onsite preparation, system assembly, installation, and necessary piping or wiring to connect the system to your home. Systems used exclusively for heating pools or hot tubs are not eligible for the tax credit.
- Location and Use: The geothermal system must be installed in a residence located in the United States. The credit is available for primary and secondary homes but does not apply to rental properties.
Additional State and Local Geothermal Incentives
In addition to the federal tax credit, rebates, low-interest financing, and property tax exemptions may further reduce the out-of-pocket costs for homeowners.
- State Rebates: Some states offer direct rebates that reduce the initial cost of geothermal installations.
- Utility Company Rebates: Local utility companies often provide incentives to encourage energy-efficient home upgrades. Check with your utility provider to see if geothermal systems are eligible for rebates.
- Low-Interest Loans: Some states and municipalities offer financing options that make it easier to invest in geothermal systems, spreading out the costs over time with favorable terms.
To find the most up-to-date information on state and local incentives, homeowners can explore the Database of State Incentives for Renewables & Efficiency (DSIRE), which provides a comprehensive list of available programs across the United States. The Indiana Office of Energy Development has announced Home Efficiency Rebates (HOMES) expected to be available in 2025.
Steps to Maximize Your Geothermal Costs and Savings
Steps to help you navigate the process and fully benefit from the geothermal tax credits and rebates include:
- Get a Property Assessment: Assess your property’s suitability before installing a geothermal system. Consult an experienced, certified geothermal installer, such as Precision Comfort Systems, if you live in Indiana. We use WaterFurnace brand equipment that meets ENERGY STAR standards and other eligibility criteria.
- Document All Expenses: Keep all receipts, invoices, and certifications related to your geothermal installation. This documentation will be essential when claiming your tax credit and any available rebates.
- Claim the Federal Tax Credit: Use IRS Form 5695 (Residential Energy Credits) when filing your taxes to claim the credit. If the credit exceeds your tax liability, the remaining amount can be carried forward into future years. For improvements installed in 2023 or earlier, use previous versions of Form 5695. Consult with a tax professional to ensure that your claim is accurate and that you maximize all available benefits.
The Long and Short-Term Benefits of Geothermal Systems
Geothermal systems offer significant financial and environmental benefits beyond the immediate tax savings. Homeowners often see up to 70% reductions in heating and cooling bills compared to conventional systems. Additionally, geothermal heat pumps are known for their durability, with lifespans of up to 25 years for indoor components and over 50 years for ground loops, providing long-term reliability.
As energy costs continue to rise, the savings from a geothermal system will only become more valuable over time. Even if you don’t plan on staying in your home forever, installing a geothermal system increases the value of your home by enhancing its energy efficiency—a key consideration for potential buyers. If you live in the Indianapolis area, get started now with a free consultation from the geothermal experts at Precision Comfort Systems.