Tax Credits – Geothermal Heating Costs

Right now is the absolute best time ever to be getting a geothermal heat pump system.  With the newest economic stimulus from Washington DC, more money than ever is being allocated for renewable energy.

There is currently a 30% Federal Tax Credit available towards the installation of a geothermal heat pump system.  That is money straight off the top of our taxes, and back into your pocket.  This can make an absolutely huge difference in the overall decision for a geothermal system.  If you can put 30% of the money it takes to install the system back into your pocket, not pay it to Uncle Sam, it greatly changes the game.

All of that in addition to the energy savings you will see makes geothermal the most cost effective renewable energy system you can get.  No 30-year payback period like you could see from a solar photovoltaic system, or futile attempts at being “green”, just straight money back in your pocket that you would normally pay to the utility companies.

Qualifications

There are a few qualifications that have to be met to receive this tax credit though.  First of all, the residence cannot be an income property, such as a rental.  It can be a vacation home or a second residence, but cannot be a rental.  Second, the geothermal heat pump must meet the requirements of the Energy Star Program at the time the expenditure is made.  You can find all of the qualified units on the Energy Star Website.  Most heat pump manufacturers meet this standard, and are Energy Star verified.  Third, the system must have been placed in service after January 1, 2009 and before December 31, 2016.

All of these requirements are very easy to meet and apply for almost every home out there.

What is included in the tax credit?

As you might expect, the issue of federal tax credits with regard to geothermal heat pumps has some unclear components. I am not a CPA or tax attorney but I did stay at a Holiday Inn Express last night so I feel more than qualified to comment on the issue.

Seriously though don’t get it twisted and try to sue me for anything I say here.

According to the IRS form 5695 that you use to apply for the credit:

“Qualified geothermal heat pump property costs. Qualified geothermal heat pump property costs are costs for qualified geothermal heat pump property installed on or in connection with your home located in the United States. Qualified geothermal heat pump property is any equipment that uses the ground or ground water as a thermal energy source to heat your home or as a thermal energy sink to cool your home. To qualifiy for the credit, the geothermal heat pump property must meet the requirements of the Energy Star program that are in effect at the time of purchase. The home does not have to be your main home.”

And then there is this from the Energy Star website FAQ section:

What parts of a geothermal heat pump are covered by the tax credit?

The majority of the geothermal heat pump property and it’s installation is covered by the 30% tax credit. All geothermal heat pump components certified by the manufacturer in the “Manufacturer Certification Statement” will be covered. There may be some add on components that will not be covered such as an emergency back up system and the ducts. These components are not directly related to the efficiency of the covered geothermal heat pump property.

IRS Guidance: Notice 2009-41 Section 3. (1)(e) Qualified geothermal heat pump property expenditures are expenditures for equipment which uses the ground or ground water as a thermal energy source to heat the dwelling unit or as a thermal energy sink to cool the dwelling unit, meets the requirements of the Energy Star program which are in effect at the time that the expenditure for such equipment is actually made (even if under § 25D(e)(8) the expenditure is deemed made at a later time for purposes of determining the taxable year for which a taxpayer may claim the credit), and is installed on or in connection with a qualifying dw elling unit.

The energy star answer says the ducts would be an example of something that would not be covered because they are not “directly related to the efficiency of the covered geothermal heat pump property”. I don’t think it is that clear because the IRS guidance below says “equipment which uses the ground or ground water to heat the dwelling…” If we can’t distribute the heat we can’t heat the dwelling. Duct work or radiant floors are equipment that heats the dwelling. In fact, the distribution system that is used to deliver the heat should have been designed to be most compatible with the lower temperatures available and is therefore directly related to the “efficiency of the covered geothermal heat pump property”.

I have discussed this with several CPA’s who agree that the credit can extend to the distribution system and even the controls that make it all work. I am not advising that anyone do anything based on my opinions here. Take my opinion on this for what it’s worth (not much) and verify anything you do with your own tax advisor.

Forms / Resources

IRS Form 5695 – Residential Energy Credits

Dsire USA

Energy Star – Geothermal Heat Pumps