You’ve already missed the best tax credit deals ever available for installing a geothermal heating and cooling system in your home, but you can still save 26% in tax credits in 2020.
Federal Tax Credit Decline Further in 2021
Since 2008, the U.S. Federal government has offered a renewable energy tax credit for installed geothermal heating and coolings systems. The tax credit expired at the end of 2016, but was reinstated retroactively to January 2017 in a budget agreement passed by Congress in February 2018. The renewed tax credit provided a 30% federal tax credit for systems installed through the end of 2019. That has passed and the maximum tax credit for installing a geothermal heat pump system in a home is 26% until the end of 2020. The tax credit will shrink to 22% in 2021 and then expire unless changes to the tax law are put in place before then.
Federal Geothermal Tax Credit Basics
• 26% in 2020, 22% in 2021
• No Maximum credit
• Does not have to be principal residence
• System must be in process by December 31 of the year to qualify for that year’s percentage.
The Federal Tax Credit Makes Geothermal a Great Value
Geothermal systems generally cost more than traditional air-to-air heating and cooling systems, but they bring a lot of energy saving benefits. For over a decade, tax credits have helped defray the upfront expense of installing a geothermal system. Depending on the type of loop you need installed at your home and the size of the system, costs can vary a lot. For purposes of illustrating the savings from the tax incentive, we’ll use the example cost of installing the geothermal system of $25,000. A system costing $25,000 would not be unusual, but installation could easily cost more or less.
Here’s you’ll actually have payed for that geothermal installation after subtracting the federal tax rebates from your 2020 taxes.
$25,000 System Price (paid upon installation)
-$ 6,500 Federal Tax Credit (received when you file your 2020 taxes)
=$18,500 Out-of-pocket cost with 26% Federal Tax Credit
If you wait until 2021, you’ll end up spending more – $1,000 more for our example system.
$25,000 System Price (paid upon installation)
-$ 5,500 Federal Tax Credit (received when you file your 2021 taxes)
=$19,500 Out-of-Pocket cost with 22% Federal Tax Credit
And of course, if you wait until 2022, you’ll have to pay the full $25,000 because there will be no tax credit available.
Renewal of Tax Credits is Not Looking Very Good
When congress suddenly reinstated the federal 30% tax credit in January 2018, it was quite a surprise. But, it appears the biggest reason that geothermal tax credits were extended that year was an attempt to be fair with various green energy technologies. Solar credits has previously been extended and geothermal had been left out.
But the extension was the opposite of the general trend in geothermal tax credits. Congress had a chance to extend the credit again at the end of 2019, when it passed the Energy Tax Extender Bill as part of a budget agreement in December 2019. While production credits, those for power plants, were extended for geothermal and other energy production, nothing was done with home solar or geothermal credits. There could be another opportunity for congress to extend the geothermal tax credit in December 2020 because the 2019 extension was less than what the sponsoring members of congress wanted. The initial draft of the bill had the 30% tax credit extended until 2024, with the reduction to 26% in 2025 and 22% in 2026. However, that four year extension got completely removed by the time it passed.
There have been some problems that make renewal less likely as well. The Miami Herald reported on the IRS investigating potential fraud related to energy tax credits, where they were claimed but a qualifying system was not installed. With the high value of these tax credits, fraud problems could easily amount to millions of dollars each year.
State governments have also been cutting incentives for geothermal heat pumps and other renewable energy systems. North Carolina had a 35% tax credit for geothermal that expired at the end of 2015 and South Carolina had a similar 25% tax credit that ran out at the end of 2018 and neither seem likely to be brought back. New Mexico’s 10-year tax incentive of 30% (capped at $9,000) was put in place in 2010 and is scheduled to sunset after 2020. So far, there isn’t much talk of renewal.
Montana has a tax credit for geothermal, but it is capped at $1,500. Even at a low capped dollar amount, Montana’s credit has been criticized and at least two attempts have been made to repeal it. Utah is the only other state with a tax credit for geothermal, with a cap of $1,600 for 2020.
Some states have tax deduction or rebate programs, which can also help with the cost of installing a geothermal system. Idaho provides a 100% tax deduction (which is not the same as a 100% tax credit) up to $5,000 each year. This deduction is taken as a 40% deduction in the installation year and 20% each of the next 3 years. Oregon has a exemption on property tax value increases that are directly from installing a geothermal system. Maryland has a grant program that allocates $3,000 to homeowners installing a new geothermal system to replace a traditional system. With tax credit programs now expired in North Carolina, South Carolina and Iowa, incentives seem to be moving more toward rebates, grants and loan programs that often don’t provide as much financial help as previous programs. However, in North Carolina and South Carolina, no new incentive programs have replaced the expired tax credits for geothermal heat pumps.
Act Quickly to Take Advantage of the 26% Tax Credit
One of the most important requirements for the federal tax credit of 26% is that the geothermal heating and cooling system is being installed by December 31, 2020. If you start too late on the project, it may not qualify for the 26% tax credit, which could be a fairly expensive mistake. Geothermal installations take longer than traditional HVAC systems. Instead of installation within a few days, there is a lot more planning and work that comes with the geothermal loop.
Geothermal systems require a loop system to extract heat (or send it back to) the ground. See our how they work page for more information about the loop system. Proper load calculations have to be performed to determine how much loop will be needed. If you have a pond or lake front, you might not need to drill to bury the loop. But in most cases, drilling is needed and this takes time. The number of contractors with the equipment and expertise to drill for a geothermal loop is limited and they usually have busy schedules. Time will be needed to go over the lot, determine where utility lines, septic fields or other obstacles are and where the loop can be safely installed.
Additionally, not just any heating and air conditioning installer is qualified for geothermal installation. It requires special knowledge and our trained geothermal installers have undergone hours of training for installing these systems. We cannot and will not use installers without the required training and experience on our geothermal installations, so if you wait until too late in the year, we may not be able to schedule your installation in time for the end of the year deadline. We’ve been through a few of these deadlines before and know that we tend to get overloaded with geothermal requests in the last couple months before a tax break is about to disappear.
If you are considering installing a geothermal system in your present home or one you are building during 2020, we suggest you give us a call today at 803-327-2700. Contacting us now will allow us to give you a complete quote, and schedule your installation so that we can be sure you qualify for all the tax credits you deserve.