Federal & State Tax Credits for Geothermal Installation: Complete 2025–2026 Guide

If you’re thinking about getting geothermal heating and cooling for your home, now's a fantastic time to invest. Thanks to the Inflation Reduction Act (IRA), which was signed into law in August 2022, homeowners can enjoy a 30% federal tax credit on the total cost of a residential geothermal heat pump system — and this credit will be around until at least 2034.

When you pair that with state incentives, utility rebates, and local programs, you could end up cutting the cost of your geothermal installation by 40–60%. This thorough guide walks you through all the incentives out there, how to claim them, and tips for getting the most savings possible.

The Federal Geothermal Investment Tax Credit (ITC)

How Much Is the Federal Tax Credit?

The Residential Clean Energy Credit, which you might know as the Investment Tax Credit, offers a 30% tax credit on the total costs for qualifying geothermal heat pump systems installed from 2022 through 2032. After that, the credit will drop to 26% in 2033 and then to 22% in 2034.

Installation Year	Tax Credit Percentage	Credit on $40,000 System
2022–2032	30%	$12,000
2033	26%	$10,400
2034	22%	$8,800

What Costs Are Covered?

The 30% credit covers the full cost of your geothermal system, which includes:

• Equipment: The geothermal heat pump unit itself
• Ground loop installation: This includes trenching, drilling, piping, and setting up the loop field
• Labor: All costs associated with installation
• Ductwork modifications: Any changes made specifically for the geothermal system
• Desuperheater: If it’s included for generating hot water
• Permits and inspections: The fees for any required permits

Important: There’s no cap on the credit amount. Whether your system costs $25,000 or $75,000, you'll get 30% back as a tax credit. This is a huge perk compared to many other energy credits that do have dollar limits.

Tax Credit vs. Tax Deduction: An Important Distinction

The geothermal ITC is a tax credit, and it’s way more beneficial than a tax deduction. Let’s break it down:

• Tax deduction: This lowers your taxable income. For instance, a $12,000 deduction at a 22% tax rate saves you $2,640.
• Tax credit: This cuts your tax bill dollar-for-dollar. So, a $12,000 credit saves you the entire $12,000 in federal taxes.

Can the Credit Be Carried Forward?

Absolutely! If your geothermal tax credit is more than your federal tax liability for the year, you can carry the unused amount forward to future tax years. For example, if you owe $8,000 in federal taxes and your geothermal credit is $12,000, you can apply $8,000 this year (meaning you pay zero federal tax) and carry the leftover $4,000 to next year's return.

Eligibility Requirements

To be eligible for the federal geothermal tax credit, your system needs to meet these requirements:

1. ENERGY STAR certification: The geothermal heat pump has to meet ENERGY STAR standards at the time of installation.
2. Residential property: The system should be installed at your primary or secondary residence in the U.S. Rental properties don’t qualify for the residential credit (but they might qualify for the commercial credit under Section 48).
3. New installation: The credit’s applicable to new systems only. Used or refurbished equipment isn’t eligible.
4. Property ownership: You need to own the home (not just lease it). Both existing homes and new builds qualify.

How to Claim the Federal Tax Credit

Step-by-Step Process

1. Install a qualifying system: Partner up with a certified geothermal contractor to get an ENERGY STAR-certified geothermal heat pump system installed.
2. Keep all documentation: Make sure to save all receipts, invoices, contracts, and the Manufacturer's Certification Statement that shows your system meets the efficiency requirements.
3. File IRS Form 5695: When you're filing your federal tax return, fill out Part I of IRS Form 5695 (Residential Energy Credits) to figure out your credit.
4. Transfer to Form 1040: Once you've calculated your credit amount, transfer it to Schedule 3 of your Form 1040, which will directly lower your tax bill.

Documentation Checklist

Keep these documents handy for your records (and in case the IRS comes knocking):

• Contractor invoices that break down the costs
• Manufacturer's Certification Statement for your heat pump
• Documentation showing ENERGY STAR certification
• Proof of payment (like canceled checks or credit card statements)
• Building permits and inspection certificates
• Any financing agreements

State-Level Geothermal Incentives

Lots of states provide extra incentives that add to the federal credit. Here are some of the most generous state programs:

States with Geothermal Tax Credits

• New York: You can get a 25% state tax credit (up to $5,000) along with NYSERDA rebates ranging from $1,500 to $3,000 per system.
• Oregon: The Energy Trust of Oregon offers rebates up to $1,750 for qualified installations.
• South Carolina: There’s a 25% state tax credit (up to $3,500) available for geothermal systems.
• Maryland: The Maryland Energy Administration provides grants and a Clean Energy Incentive Tax Credit.
• Idaho: Residents can benefit from a state tax deduction for alternative energy devices.
• Montana: You can claim an alternative energy system tax credit of up to $1,000.

Utility Company Rebates

Many electric utilities provide significant rebates for geothermal installations since these systems help lower peak demand and even out seasonal load profiles. Here are a few examples:

• Duke Energy: Offers up to an $875 rebate for each ton of installed capacity.
• Consumers Energy (Michigan): They have rebates for ENERGY STAR geothermal installations.
• National Grid: Provides incentives through mass-save programs in Massachusetts and New York.
• Various rural electric cooperatives: Many co-ops give $500 to $2,000 per system, plus they offer discounted electricity rates for geothermal customers.

Reach out to your local electric utility directly or visit the Database of State Incentives for Renewables & Efficiency (DSIRE) at dsireusa.org to find out about current programs in your area.

Property Tax Exemptions

A bunch of states actually don’t count the added value of renewable energy systems when it comes to property tax assessments. So, if you install a geothermal system, it won’t bump up your property taxes, even though it does boost your home’s market value. States offering these exemptions include Connecticut, Illinois, Indiana, Iowa, Maryland, Massachusetts, Minnesota, Montana, New Hampshire, New Jersey, New Mexico, New York, North Dakota, Ohio, Rhode Island, Vermont, Virginia, and Wisconsin.

Maximizing Your Total Savings

Strategy 1: Stack Federal and State Credits

So, here’s the deal: the federal credit and state credits work independently, meaning you can take advantage of both. For instance, if you’re a homeowner in New York looking to install a $45,000 geothermal system, you could snag:

• Federal ITC (30%): $13,500
• New York state credit (25%, max $5,000): $5,000
• NYSERDA rebate: $2,500
• Total incentives: $21,000
• Net cost: $24,000 (47% reduction)

Strategy 2: Time Your Installation Strategically

If you’re thinking about installing geothermal in the next few years, getting it done before the end of 2032 is a smart move to snag the full 30% federal credit. After 2032, that credit drops to 26% and then 22%. So, the sooner, the better for your wallet!

Strategy 3: Consider Adding Solar

Good news! The same 30% federal tax credit applies to solar panel installations. Combining geothermal with solar is a winning strategy: the solar panels produce the electricity your geothermal system uses, which could even help you reach net-zero energy consumption. Plus, you can claim both credits at the same time!

Strategy 4: Include All Eligible Costs

Make sure your contractor’s invoice includes all eligible expenses. Some homeowners forget to add in things like permit fees, ductwork changes, or the desuperheater when calculating their credits. Remember, every qualifying dollar can save you 30 cents in taxes!

Strategy 5: Utilize Financing Programs

There are a bunch of programs that can help make financing a bit simpler:

• PACE financing: This is available in lots of states and lets you finance through your property taxes.
• Green mortgages: Think about FHA Energy Efficient Mortgages and Fannie Mae's Green financing options.
• Utility on-bill financing: Some utility companies allow you to pay directly through your monthly bill.
• USDA Rural Energy for America Program: This offers grants and loans specifically for rural homeowners.

Commercial Geothermal Tax Credits

If you're a business owner or manage a commercial property, you’ve got some great incentives available to you:

• Section 48 Investment Tax Credit: You can get a 30% credit for commercial geothermal installations, and it can go up to 50% if you qualify for domestic content and energy community bonuses.
• MACRS depreciation: There’s a 5-year accelerated depreciation for commercial geothermal equipment, which means you can snag some extra tax savings.
• Direct pay option: If you’re part of a tax-exempt entity like a nonprofit, municipality, or school, you can actually receive this credit as a direct payment.

Common Mistakes to Avoid

1. Not filing Form 5695: You won’t get the credit automatically — you need to file the form along with your tax return.
2. Missing the ENERGY STAR requirement: Make sure your system has ENERGY STAR certification before you go ahead with the installation.
3. Forgetting to include all costs: A lot of homeowners forget to include the ground loop, which can often be the biggest expense, and only claim the heat pump cost.
4. Not carrying forward unused credits: If your credit is more than your tax liability, don’t let it go to waste — carry it forward!
5. Confusing credits with deductions: Remember, a tax credit directly lowers your tax bill. Just be sure you’re applying it the right way.
6. Not checking state incentives: Many homeowners only take advantage of the federal credit, missing out on potential state savings that could add up to thousands.

Frequently Asked Questions

Can I claim the credit if I finance the system?

Absolutely! The tax credit covers the total cost of the system, no matter how you decide to pay for it. Whether you're using cash, a home equity loan, or financing through a contractor, you can still claim the full 30% credit.

Does the credit apply to a second home?

Yes, it does! The Residential Clean Energy Credit is available for both your primary residence and any second homes you own. Just keep in mind that it doesn’t apply to rental properties (but there might be commercial credits available).

Can I claim the credit for a system installed by my builder?

Yes, you can! If the geothermal system is installed in a home that you own, you can claim the credit. If you buy a new home that already has a geothermal system, you can still get the credit for the geothermal part of the home's cost, as specified by your builder.

What if my state has no additional incentives?

No worries! Even if there aren’t any state incentives, the 30% federal credit is pretty significant. For instance, with a $40,000 system, you’d still get a $12,000 federal tax credit, bringing your net cost down to $28,000. Plus, when you factor in energy savings of $1,000–$2,000 a year, this investment really pays off.

Take Action: Maximize Your Geothermal Savings

1. Find certified geothermal contractors in your area using our directory.
2. Request quotes from at least three different installers.
3. Ask each contractor about qualifying for the federal tax credit.
4. Check DSIRE (dsireusa.org) for state and local incentives.
5. Contact your utility company to learn about available rebates.
6. Consult a tax professional to make the most of your credit strategy.

Don’t wait — the 30% credit is available now, making geothermal more affordable than ever. If you’re a geothermal contractor, join our directory, or browse our listings to find the right installer for your project.