Energy Tax Credit

In October 2008, geothermal heat pumps were added to section 25D of the Internal Revenue Code. This created a 30% tax credit for costs associated with qualified geothermal equipment “placed in service” through the end of 2016. Property is usually considered to be placed in service when installation is complete and equipment is ready for use. However, if the system is part of the construction or renovation of a house, it's considered placed in service when the taxpayer takes residence in the house.

  • Federal Credit of 30% of total system cost
  • New Mexico State credit of 30% of total system cost (capped at $9,000.00)
  • No limit to credit amount for 2009 and beyond
  • Can be used to offset AMT tax
  • Can be used in more than one year
  • Can be combined with solar and wind tax credits
  • Can be combined with energy efficiency upgrade credits

What's Eligible

Geothermal equipment that uses the stored solar energy from the ground for heating and cooling, and that meets Energy Star requirements at the time of installation is eligible for the tax credit. Covered expenditures include labor for onsite preparation, assembly, or original system installation and for piping or wiring to connect a system to the home. The structure must be located in the United States and used as a residence by the taxpayer, although primary residency isn't required. In fact, if geothermal is installed in more than one home, there's no limitation on the number of times the credit can be claimed.

What's Not Eligible

The credit can't be claimed for spending on equipment used solely for hot tub or pool conditioning, nor on previously used equipment.

How to Claim the Credit

Use IRS Form 5695 (2008) to claim the Residential Energy Efficient Property Credit for 2008. Form 5695 for 2009 has not been published yet. For systems completed in 2008, the maximum tax credit is capped at $2,000. For property placed in service after the start of 2009, there's no limit on the credit amount. The tax credit can be used to offset both regular income taxes and alternative minimum taxes (AMT). If the federal tax credit exceeds tax liability, the excess amount may be carried forward into future years. Spending on geothermal heat pump property adds to your home's cost basis, but also must be reduced by the amount of the tax credit received.

Learn more about geothermal energy incentives from the Interstate Renewable Energy Council and Energy Star.



Energy Tax Credit

What's the difference between a tax credit and a tax deduction?

A tax credit is a tax benefit offered by either the IRS or a state/local government for spending money on projects such as a solar energy installation at ones home or business.

The benefit comes in the form of a direct reduction in the amount of income taxes you might owe or by an increase in the amount of refund you get. For example, if you owed $5,000 in Federal income taxes and received a $1,000 tax credit, you would now only owe $4,000. You don’t receive an income credit when you buy the product, like an instant rebate. You claim the tax credit on your federal income tax form at the end of the year.

This is very different from a tax deduction, which does not directly reduce the amount you owe. A tax deduction reduces the amount your tax is calculated on. Receiving a $1,500 tax deduction might only reduce what you owe by a few hundred dollars.

Energy tax credits for home improvements

Solar hot water heating and solar panel systems placed in service by December 31, 2016 are eligible for the 30% tax credit, with no upper limit, (for existing homes and new construction), as are small wind systems. In order to qualify for the tax credit, solar water heaters must meet Energy Star requirements. More information on renewable tax credits is available from the Energy Star website.

New Mexico also offers a Solar Tax Credit for your New Mexico Income Tax. This credit is 10% of the total cost of the system (capped at $2000.00).


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