If you’re thinking about installing a geothermal heat pump, there’s good news. A federal tax credit allows homeowners to deduct a 30 percent tax credit for the installation of a geothermal heat pump.

President Obama signed the American Recovery and Reinvestment Act of 2009 into law on February 16, 2009. The ARRA was designed to help stimulate the economy with spending and tax credits aimed at investing in the nation’s road and energy infrastructure and increasing the energy efficiency and performance of our homes and commercial buildings. As part of the ARRA, homeowners who install qualifying geothermal heat pump systems can claim a federal tax credit of 30 percent of the installed costs. There is no limit to the amount that can be claimed.

Labor costs associated with the installation and related materials, including piping and wiring, are included and eligible for the 30 percent credit. However, on Nov. 1, 2013, the IRS stipulated that the distribution system for the home and a back-up emergency heating or cooling system are not eligible for the credit.

The credit can be used for geothermal heat pump systems installed in new or existing homes, second homes, apartments, condos, and mobile homes. However, to be eligible for the tax credit, the geothermal heat pump must meet the following requirements:

  • It must use the ground or ground water as a thermal energy source to heat the dwelling unit or as a thermal energy sink to cool the dwelling unit.
  • It must meet the requirements of the Energy Star program which are in effect at the time the equipment is installed.

The tax credit is available through December 31, 2016. It must be claimed in the year the geothermal heat pump system was placed into service. If the credit exceeds your income tax liability for the year, the remaining amount may be carried forward into future years. It can also be combined with other tax credits, including solar and wind tax credits and energy efficiency upgrade credits. Some states offer additional incentives in addition to the federal credit.