Geothermal Tax Credit Explained

Jason Murphy

Jason Murphy

A geothermal tax credit of 30% of the total system price is available for systems using qualified geothermal heat pumps.

In October 2008, geothermal heat pumps were added to section 25D of the Internal Revenue Code. This created a 30% federal geothermal tax credit for costs associated with qualified geothermal equipment “placed in service” through the end of 2016.

Equipment is usually considered to be placed into service when installation is complete and equipment is ready for use, or for new construction, when the owner takes residence.

Geothermal Tax Credit Overview

• 30% of total system cost
• No limit to credit amount for 2009 and beyond
• Can be used to offset AMT tax
• Can be used in more than one year
• Can be combined with solar and wind tax credits
• Can be combined with energy efficiency upgrade credits

What’s Eligible?

Geothermal heat pump systems that meet Energy Star requirements at the time of installation are eligible for the 30% federal tax credit. Covered expenditures include all parts and labor for the entire heating system.  This includes loopfields, ducting, electrical work, and even radiant heating systems.

The structure must be located in the United States and used as a residence by the taxpayer, although primary residency isn’t required. In fact, if geothermal systems are installed in more than one home, there’s no limitation on the number of times the credit can be claimed.

What’s Not

The credit can’t be claimed for spending on equipment used solely for hot tub or pool heating, nor on previously used equipment.

How to claim the Credit

Use IRS Form 5695 to claim the Residential Energy Efficient Property Credit.  For geothermal systems placed in service after the start 2009, there’s no limit on the geothermal tax credit amount.

The tax credit can be used to offset both regular income taxes and alternative minimum taxes (AMT). If the federal tax credit exceeds tax liability, the excess amount may be carried forward into future years. Spending on geothermal heat pump property adds to your home’s cost basis, but also must be reduced by the amount of the tax credit received.

Non-Business Energy Property Credit

The Non-Business Energy Property Credit is a 30% tax credit (up to $1,500) for spending on qualified energy efficiency improvements made to an existing home between 2009 and 2010. This credit is for improvements on insulation, windows, doors, and solar reflective roofing materials and can be claimed in addition to the Energy Efficiency credit for geothermal property.

The improvements must be for a dwelling in the United States that’s owned by the taxpayer and used as the principal residence.  IRS Form 5695  is used to claim the credit.

Home Businesses

If a structure serves as both a residence and place of business, spending may need to be allocated between residential and business use. If residential spending is at least 80%, then all spending qualifies for the residential credit. For commercial spending, there’s a 10% tax credit available, and 5-year MACRS accelerated depreciation.


Eagle Mountain does not guarantee the accuracy of this tax-related information.  All customers are advised to consult a qualified tax advisor or attorney before making purchase decisions.  If you have specific questions please call Eagle Mountain at 1-800-572-7831.

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