How did the Tax Credit Change in 2022?
It's a great time to be interested in geothermal. In 2022 the Inflation Reduction Act (IRA) 2022 was passed, causing the geothermal federal tax credit to increase from 26% to 30% until 2032. The tax credit was also extended until 2034 at a step-down rate. We've never seen a tax credit for geothermal laid out so far in advance, so it's exciting to see the credit become more reliable than ever for home and building owners.
The bill extends the credit for residential installations at the following rates:
- 2022-2032 - 30%
- 2033 - 26%
- 2034 - 22%
The commercial tax credit is extended under a two-tier structure:
- A "base rate" of 6% (or 1/5 of the bonus rate)
- A "bonus rate" of 30%
- An additional “Domestic Content Bonus” of 10% for US-made products, which Enertech products qualify for (specific labor requirements may need to be met to qualify for the domestic content bonus)
Will I Qualify for the Geothermal Tax Credit?
Upon installation finalization, the ground source heat pump must meet Energy Star requirements to qualify for the federal tax credit. Enertech is an Energy Star Certified manufacturer, meaning almost all Enertech-manufactured geothermal heat pumps are Energy Star certified. Of course, please confirm with your installer that your heat pump is eligible for the tax credit prior to installation.
The home or building in which the geothermal unit is being installed must be your “principal residence,” and it needs to be located in the United States to qualify. Military service, vacation, education, business, circumstances such as illness, etc., will not change your principal residence. You can utilize the tax credit for both your primary and secondary home. You can use the tax credit multiple times if you install geothermal in more than one home or building. Secondary homes, vacation homes, condos, duplexes, mobile homes, etc., can all qualify for the federal tax credit. Please consult your tax advisor to see if you qualify for the tax credit for more than one installation.
The tax credit can be claimed for existing homes/retrofit and new construction.
The geothermal system will not qualify for the tax credit if it is used solely for heating hot tubs or pools.
Before you apply for the geothermal federal tax credit, your system must be efficiently running or “placed in service.” You cannot apply for the tax credit until the system is installed and running.
Products used solely for rental properties will not qualify for the tax credit. The tax credit is only available for your principal residence(s). If your principal residence is also being rented out, you could receive a percentage of the geothermal tax credit. More details on this are included in Section 25C€ (2) Joint ownership of energy items on the IRS form. Please seek assistance from a tax professional to confirm if you qualify and the extent.
The tax credit is not refundable. The credit can be carried forward for a maximum of ten years.
The geothermal tax credit covers expenses associated with ground source heat pumps. This can include onsite preparation, equipment, assembly, and necessary piping or wiring when used to connect the system to the home. When determining the total cost of the geothermal system, you can include all covered products, labor if you did not do the labor yourself, and sales tax. Ductwork, radiant flooring, or additional add-on components are not eligible for the federal tax credit.
HOW YOU CAN EASILY APPLY FOR THE GEOTHERMAL FEDERAL TAX CREDIT
Thinking about filing taxes can be daunting, but we want to make it as easy as possible for you. Having a tax advisor is recommended to help along the way. After your geothermal system has been installed, you will fill out form 5695 to include with your tax documents. A link to form 5695 can be found below. The form is split into two parts, the Residential Energy Efficient Property Credit and the Nonbusiness Energy Property Credit. You only need to fill out the part relating to your project and the type of credit you are eligible to claim. You will need to know the total costs of your geothermal system and installation to fill out the form accurately. We offer a guide to residential tax incentives that may be helpful to read before starting the process. You can also download a Manufacture’s Certification Statement for your records.
- Form 5695
- Form 5695 Instructions
- IRS Phone Number 1-800-829-1040
Not only will the federal tax credit help you better afford a geothermal system, but there could also be state and local incentives that you could qualify for as well. Check with your installer or a tax expert to see if they recommend any incentives. We also recommend checking www.dsireusa.org, a database of state incentives that could be helpful to you and allow you to utilize maximum incentives. We'd love to chat with you if you have any questions about your options and guide you to helpful resources.