You may have heard that for 2020 the government is making a 26% tax credit available for geothermal heat pump systems. But who gets it, how do they get it, and what exactly does that mean?The tax credit was part of a 2005 law to incentivize more efficient heating systems, and it worked so well that it got extended several times. Even after it expired in 2016, it was revived in 2018 and made retroactive to January 2017.
The 26% number means that if you install a geothermal heat pump system in 2020, you can claim 26% of the cost of the system and installation as a tax credit. Note that a tax credit, which is taken directly off the bottom line of your tax bill, is different from a deduction, which reduces the amount of income that you will owe taxes one. Given the same dollar amount, a credit gives you more than a deduction. The tax credit is non-refundable, if the amount exceeds your total tax liability, the IRS won’t pay you the difference, but the difference can carry over to your next year’s taxes.
If you get it up and running (and if you have use of the house) by the end of this year, 26% of what you spent on your geothermal heat pump will be taken off what you owe the IRS for the year. Bear in mind that number will go down to 22% in 2021.
Efficiency. The system must at least meet the requirements of Energy Star, a government energy efficiency program. Many geothermal systems on the market meet those requirements, but you’ll want to check since not all of them do.
Residency. You must own and have use of a property to qualify, and that includes having a vacation home. If you lease a home out to tenants, you can’t claim it unless you live in the home yourself for part of the year, and even then you might only be able to claim it for the part of the year you were in the house.
Equipment. The credit covers onsite preparation, labor, equipment, assembly, and the wiring and piping necessary to get it functional. It does not cover optional additions like new ductwork or a generator, equipment that is only used for hot tubs or pools, or pre-owned equipment. For more details, you can read the relevant section of the tax code here.
How to claim
When doing your taxes for the year in which you installed a geothermal system, you’ll need to fill out IRS form 5695, following the instructions correctly. If you’re able to use a professional tax service, they can make sure you haven’t made any mistakes and maybe even catch some energy-based tax savings you didn’t know you could claim.
So hey! Maybe you’ve been thinking about investing in a more efficient HVAC system that will both save heating expenses and increase your home’s rental or sale value, but you’re not sure if it’s worth the cost. If that’s you, this year might be the best time to go ahead with it, because you can get all the savings and added home value while Uncle Sam essentially reimburses you for a quarter of the costs. Next year the credit drops to 22%, and we don’t know if Congress will extend it.