The 2021 Federal Geothermal Tax Credit: Your Questions Answered
If you’re interested in home geothermal, you’re probably curious about how you can save money with the 2021 federal geothermal tax credit.
But as with many things related to government and finance, it’s not exactly clear or easy to understand.
What does a 26 percent geothermal tax credit mean? Do I qualify for the tax credit? How do I claim it? In this article, we’ll answer these questions and more about the geothermal federal tax credit.
What is the Geothermal Tax Credit?
Let’s start here. What is the tax credit and how does it work? The initial federal investment tax credit was part of the Energy Policy Act of 2005. This bill was passed to help solve energy problems and provide tax incentives for existing and new types of energy production, including wind and solar.
At the time, the credit only lasted through 2007, but it was so successful that it was extended several times. In 2008, the program was broadened to include geothermal heating and cooling systems.
In 2016, the tax credit did actually expire. However, it was reinstated in 2018 to include not just households with geothermal heat pumps installed in 2018, but it also retroactively included any geothermal heat pumps installed after January 1, 2017.
The federal tax credit initially allowed homeowners to claim 30 percent of the amount they spent on purchasing and installing a geothermal heat pump system from their federal income taxes. The tax credit currently stands at 26 percent throughout 2021 and 2022 before decreasing to 22 percent in 2023.
Homeowners who install geothermal can get the tax credit simply by filling out a form declaring the amount you spent when you file your federal income taxes. As long as your system is up and running by the end of 2022, you can claim the 26 percent from your federal income taxes.
It’s an incredible advantage and can significantly reduce the cost of the system overall. There’s no limit to the value of the tax credit. As long as you still own the house where the system is installed, you can claim the true percentage based on the year you installed the system.
Do I qualify for the geothermal tax credit?
To be eligible for the federal tax credit for geothermal, your geothermal heat pump must be placed in service between October 3, 2008, and December 31, 2023. For most homeowners, this means the installation is complete and the equipment is ready for use.
But if the system is installed as part of the construction or renovation of a house, it’s considered placed in service when the taxpayer moves into the home.
Geothermal System Criteria
Your geothermal heat pump has to meet Energy Star (a federal energy-efficiency program) requirements. This means the heat pump must meet or exceed specific efficiency standards. In fact, all Energy Star geothermal heat pumps are over 45 percent more energy efficient than standard options. Not every geothermal heat pump is qualified, so make sure your geothermal installer meets these standards up front. Dandelion Geothermal is an Energy Star Certified geothermal installer!
You must own the home where the geothermal heat pump is installed to qualify for the tax credit. It doesn’t need to be your primary home, though — it can be a second home or vacation property as long as it’s located in the United States.
The geothermal credit can’t be claimed for rental properties unless you rent a second home for part of the year. In that instance, you may be able to claim the credit for the portion of time you live in the home. For example, if you live in your second home for 6 months out of the year but rent it out the rest of the time, you may be able to claim 50% of the 26% tax credit.
System Payment Method
It doesn’t matter if you buy the system upfront or finance your purchase. Either way, you’re eligible for the tax credit.
A tax credit is a dollar-for-dollar reduction of the income tax you owe. So in order to qualify for the Federal Tax Credit, you need to have a large enough tax burden to benefit.
Some types of tax credits are refundable. That means you can still receive the full amount of the credit even if the credit exceeds your entire tax bill. For example: If your tax bill is $300, but your refundable tax credit is $1000, you will receive a $700 refund.
The Geothermal Tax Credit, however, is a non-refundable personal tax credit. It can only reduce or eliminate your liability (how much money you owe to the IRS). If you credit is greater than your tax liability, it will not generate a tax refund. For example: If your tax bill is $300, but your non-refundable tax credit is $1000, you will only use $300 of your credit (and will have $700 unused).
Fortunately, the Geothermal Tax Credit allows homeowners to apply their tax credit over multiple years. If your tax burden in 2021 is less than the full amount of your credit, you can carry over the remainder when filing your taxes in 2022. You can even keep doing this as long as the tax credit is active. The Geothermal Tax Credit can offset regular income taxes and even alternative minimum taxes.
For example: Let’s say you purchase a geothermal system for $20,000. That could mean you’re eligible for a $5,200 tax credit. But let’s say you only owe $3,000 in taxes. In this situation, you can simply claim $3,000 in credit this year and $2,200 next year.
To benefit from the Federal Tax Credit, you must owe at least as much in taxes as you would claim for the credit, even if it’s over several years.
How do I claim the Geothermal Tax Credit?
After you’ve had your geothermal system installed, you’ll simply fill out an additional form when it’s time to file your federal income taxes. The form you’ll need to fill out for the IRS is 5695. You can follow the form’s instructions here.
Although the name doesn’t exactly roll off the tongue, it can be a big help come tax time. It’s best to work with a tax professional who will know exactly how to fill out your new form for the tax break. This will ensure that everything is filled out accurately, and they can also help advise you on other potential energy tax credits you might be eligible for.
Of course, you can fill this form out yourself, but be sure to read and thoroughly follow the instructions before you do. If you’d prefer to reach out to the IRS directly, you can contact them through their website or by calling 1-800-829-1040.
What expenses are eligible for the Federal Geothermal Tax Credit?
The Geothermal Tax Credit covers expenses including labor, onsite preparation, assembly, equipment, and piping or wiring to connect a system to the home. Electrical upgrades may also be eligible.
Add-on components, like ductwork or a new generator, are not covered by the tax credit. What other expenses aren’t covered by the tax credit? Equipment used only for hot tub or a swimming pool, zoning, and used components (like a pre-owned geothermal heat pump).
Can you use the Geothermal Tax Credit more than once?
Yes, you can use the tax credit multiple times if you install geothermal in more than one home. Dandelion has several customers who installed geothermal in both their primary and secondary homes.
There is no limit to the number of times or a maximum amount you can claim for the tax credit.
Can you combine the Geothermal Tax Credit with other energy-efficiency tax credits?
Yes, it can be combined with solar and wind tax credits or any applicable energy efficiency upgrade credits. That’s excellent news because solar and geothermal work great together!
How long will the tax credit last?
This revival of the tax break will be available for homeowners through December 31, 2022, at 26% percent. From there, the percentage decreases to 22 percent in 2023. After that, the geothermal tax credit goes away for homeowners.
If you’ve been considering geothermal, there couldn’t be a better time than now to take advantage of this tax break to shave off some of the initial cost. With all the money you’ll save with the geothermal tax break, you’ll make your payback period even smaller.
Are there any other geothermal incentives available?
Many states offer incentives and rebates, including New York & Connecticut. New York State’s Clean Heat Program is administered by the homeowner’s utility. Each utility has a unique incentive. That means a homeowner who uses Con Edison will qualify for a different incentive amount than a homeowner who uses National Grid.
The specific incentive amounts are based on the installed heat pump’s total heating capacity BTUH. They range between $0.15 per BTUH and $0.285 per BTUH. For example, a 4 Ton Dandelion Air (DA) heat pump, which is usually appropriate for a 2,000 square foot home, has 41,000 BTUH. So, a homeowner who installs a 4 Ton DA heat pump can receive between $6,150 and $11,685, depending on his or her utility.
A geothermal heat pump containing a desuperheater qualifies for an additional incentive as well! Many, but not all, heat pumps installed by Dandelion include a desuperheater ─ a component that uses existing heat in the system to warm water. This incentive is either a flat $100 or $150 per heat pump, depending on the utility.
Connecticut’s geothermal heat pump incentives are administered by Connecticut’s Department of Energy and Environmental Protection (DEEP). The incentives for Connecticut homeowners range from $750/ton – $1,500/ton depending on your current heating set-up. For more information visit our Tax Incentives page here.
Ready to see how much you can save with Dandelion Geothermal? Reach out to us today to schedule your free energy consultation.
Dandelion Energy and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors.