You know that installing a new geothermal heat pump could qualify you for a 30% federal tax credit according to the government (they reinstated this credit as of February of 2017), but how do you know if what you’re getting qualifies for the credit? What not included? How do you claim the credit?
The first step is to know what you’re having installed
Geothermal units installed in your new or remodeled residence that use stored solar energy from the ground for heating and cooling AND that also meet Energy Star requirements at the time of installation are eligible. The credit can also be retroactively applied to units that were “placed in service” on January 1, 2017 or after.
What is “placed in service”? It means that the equipment has been installed and it is ready for use. Should the equipment be a part of new construction, it’s considered placed in service when you as the taxpayer take residence in the house. Primary residence in the US is not required, but the structure itself must be located there and used at least part of the time as a residence by the taxpayer (so it can be a vacation home or partial-year residence and still be eligible). There’s no limit to the times the credit can be claimed if there are other residences that qualify. This credit, however, is slated to decrease each year through 2021, which is important to note.
Remember that some units do NOT qualify
Equipment for rental units are not eligible, nor are equipment used solely for things like hot tub or pool conditioning, nor previously used equipment. Electric strip heat and ductwork distribution systems are also no longer included in the 30% credit. Keeping this straight can help you avoid unhappy surprises when you apply.
To claim the credit, you’ll need to use IRS form 5695. The credit you then receive can be used to offset both your regular income taxes and your alternative minimum taxes. It’s also nice that the excess amount may be carried into future years should the credit exceed the tax liability. Noting that the cost basis of your home also must be reduced by the credit received is also important so you have an accurate valuation.
Your HVAC system is costly – it’s oftentimes the most costly system in your home, but it can also easily pay for itself in some situations, especially with the benefit of the tax credit. Understanding it is the key.