The right strategy for home improvements is often considered expensive and challenging. Most homeowners avoid specific changes to save a few bucks. But what if these improvements help you save a ton of money and taxes? Federal Tax credits for home restorations and improvements, including the Federal tax credit for geothermal heat pumps, are a great way to save money and the planet simultaneously.
With government initiatives like these, all residents can make sustainable energy-saving choices. In this article, you will learn about federal tax credit for home improvements and how geothermal hand pumps are a good tax-saving choice.
What is the Federal Tax Credit for Geothermal?
The Federal government offers a tax credit for geothermal heat pump systems as a financial incentive. This incentive encourages homeowners to invest in energy-efficient heating and cooling solutions and save taxes. Geothermal energy systems harness the natural heat stored beneath the Earth’s surface. They are an energy-efficient way to provide heating, cooling, and hot water for residential, commercial, and industrial applications.
Understanding Geothermal Energy Systems
Geothermal Energy systems are a home improvement initiative that maintains heating and cooling for all application purposes. The central component of a geothermal energy system is the geothermal heat pump (GHP) unit. It is also known as a ground-source heat pump, and this unit transfers heat between the ground and the building to provide heating and cooling. GHP systems consist of three main components:
- The heat pump unit installed indoors,
- The ground loop is buried underground,
- The building’s distribution system (ductwork or radiant heating/cooling).
Overview of the Federal Tax Credit
The Tax Credit for residential energy efficiency improvements is called the Residential Energy Efficiency Property Credit. This federal tax incentive gives homeowners incentives to make their homes more energy-efficient. Here’s an overview of this tax credit and eligible geothermal heat pump systems:
- It must be purchased and installed in residential properties in the United States.
- It must use the Earth’s constant temperature and provide homes with heating, cooling, and hot water.
- Its eligible expenses must only include equipment, installation, and associated labor costs.
Eligibility Criteria
The eligibility criteria for the tax credit include:
- The geothermal heat pump system must meet specific energy efficiency requirements, including guidelines established by the Department of Energy (DOE) and the International Energy Conservation Code (IECC).
- The system must be installed in the taxpayer’s primary residence, and new construction and existing homes are usually eligible.
- This tax credit does not apply to rental properties, second homes, or commercial properties.
How to Claim the Tax Credit for Geothermal?
To claim the tax credit for a geothermal heat pump system, taxpayers must complete IRS Form 5695, Residential Energy Credits:
- One can mention geothermal heat pumps in their tax filing.
- On Form 5695, taxpayers must enter the total cost of the geothermal heat pump system.
- One can get up to 26% of the purchase price of a geothermal system.
Financial Planning and Cost Analysis
Geothermal energy systems are highly efficient as they utilize renewable heat from the ground. Although initial installation costs for geothermal systems may be higher than conventional HVAC systems, these systems can lead to significant long-term energy cost savings due to lower operating costs and reduced reliance on fossil fuels.
Geothermal energy systems are a great initiative to minimize energy consumption at your home. The federal government provides a tax credit for 26% of the total installed cost for geothermal heat pump systems. There is no maximum credit limit for residential geothermal heat pump systems, and this credit can be applied to both the equipment and installation costs. This makes geothermal systems an eco-friendly and economically better alternative to conventional heat pumps.
Read related blog: Federal Tax Credit for Wood Stoves
Conclusion
People of different classes might find it difficult to save energy and taxes simultaneously. The Federal Tax Credit for installing a geothermal heat pump system is a valuable incentive for homeowners. This incentive allows homeowners to add energy-efficient heating and cooling solutions.
Homeowners can claim this incentive to offset some of the costs of installing a geothermal system. This will help them benefit from long-term energy savings, tax benefits, and environmental benefits. Check out Beem and find resources for your state, including tax rates, credits, and deadlines—all in one place. Instantly estimate your income tax liability or refund with Beem’s Income Tax Calculator.
