Tax - Claiming Credit for Installing Geothermal Pumps in Residential Homes

Yes, you can always use this credit to lower your taxes. But, you won't get any refund when your tax liability is reduced to zero or below.

In other words, you can't claim any balance of this credit as a refund unless you still have some tax liability left after deducting ALL credits. That is understandable; only those who have tax liabilities can claim a tax refund.

Geothermal heat pumps can qualify for this energy efficiency/renewable energy tax credit upto 30% of the cost. That includes installation and labor costs.

As long as that percentage is maintained, there is no upper limit.

(But let us not forget the big picture and that it doesn't mean sky is the limit - yes it can reduce your tax liability but you won't get any refunds of the excess credit if all credits have reduced your taxes to zero or below.)

The earlier Emergency Economic Stabilization Act of 2008 included a program to give $2000 tax credits to homeowners who install geothermal heat pump systems in 2008 through 2016 but that limit has been removed from 2009.

Now comes the best part: You have time to avail this credit upto the year 2016. The law specifies the eligible period of installation thus: It must be installed in a home between January 1, 2009 and December 31, 2016.

There are some conditions to be met regarding your home:

The geothermal pump should be installed in a home that you own and use as your "principal residence."

Your home can be a house, houseboat, mobile home, cooperative apartment, condominium, and a manufactured home. The home must be here in the United States.

When we say "principal home", it means the home where we live most of the time, though we may be away temporarily for hospitalization, education, business, military service, or vacation.

The pump equipment used should meet the Energy Star program standards which are in effect at the time you install it.

At this time, the equipment used must meet, at the minimum, the following ratings of Energy Efficiency Ratio (EER) and Coefficient of Performance (COP) values, depending on the type of technology used and increasingly tougher limits set for periods starting 2009, 2011 and 2012:

Starting December 1, 2009:

Water-to-Air Closed Loop System......... EER=14.1, COP=3.3
Water-to-Air Open Loop System............ EER=16.2, COP=3.6
Water-to-Water Closed Loop System... EER=15.1, COP=3
Water-to-Water Open Loop System...... EER=19.1, COP= 3.4
DGX System.............................................. EER=15, COP=3.5

Starting January 1, 2011:

Water-to-Air Closed Loop System........... EER=16.1, COP=3.5
Water-to-Air Open Loop System.............. EER=18.2, COP=3.8
Water-to-Water Closed Loop System..... EER=15.1, COP=3
Water-to-Water Open Loop System.........EER=19.1, COP= 3.4
DGX System................................................. EER=16, COP=3.6

Starting January 1, 2012:

Water-to-Air Closed Loop System............ EER=17.1, COP=3.6
Water-to-Air Open Loop System............... EER=21.1, COP=4.1
Water-to-Water Closed Loop System...... EER=16.1, COP=3.1
Water-to-Water Open Loop System..........EER=20.1, COP= 3.5
DGX System.................................................. EER=16, COP=3.6

The new rules of December 1, 2009 did remove some of the earlier restrictions like the need for a desuperheater, an integrated demand water heater or a separately installed compressor to provide demand water heating.

Recent changes include the following:

- Geothermal heat pumps are no longer required to provide some or all of the domestic water heating.
- Water-to-water geothermal heat pumps have also been included in the eligibility list.

So now a geothermal heat pump need not specifically be used for water heating to qualify for the tax credit.

How to claim this credit?

You will have to file Tax Form 5695 with your annual tax return.

Remember to keep the supporting documents for your claim, in case they are needed for verification later:

1. The sales receipts for the price of the equipment
2. The bills for installation and labor charges..
3. The manufacturer's certification regarding Energy Star ratings for the products. This should come in the packet along with the owner's manual and warranty documents.

Though this was mentioned last, it is something you should remember to do first.

Geothermal heating didn't attract consumers before as expected because the initial cost was very high and they had to wait some years before the energy savings actually paid off. But technology is improving and government too is removing restrictions, so final costs are expected to be less than before.

PLEASE NOTE:

This is only an introductory article on this subject and does not cover every aspect of it. Each individual's need and situations vary and rules can change any time. For the relevant information on technology and energy-related subjects consumers should refer to resources provided by the Department of Energy and Energy Star Program. For the latest and authoritative information on tax incentives they should refer to the resources provided by the Internal Revenue Service.