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Geothermal Tax Credits Extended

  • Posted: 01.25.2021
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Image: Federated REA

Why choose geothermal?
There’s good news if you are considering replacing your HVAC system with a newer, more energy-efficient version. See details below about a variety of credits/exemptions available to Iowans who install geothermal. And best of all, you’ll be installing a dependable, cost-effective renewable energy source to heat and cool your home (and potentially provide hot water, too).

Geothermal is considered a renewable energy as it harnesses heat from below the earth’s surface to generate clean energy, all the while supplying power 24/7 and emitting little or no greenhouse gasses. Geothermal heat pumps (GHPs) also known as ground-source heat pumps, can heat, cool and even supply hot water to a home by transferring heat to or from the ground by using the principals of refrigeration. Find more details about geothermal on the Iowa Geothermal Association website.

According to Energy.gov, it’s possible to cut energy bills by up to 65% compared to traditional HVAC units, although the Iowa Geothermal Association considers that Iowans can save up to 50% on heating costs and up to 30% in cooling costs.

Federal Tax Credit
The recently signed Federal Budget and Stimulus bill includes an extension of the Federal geothermal heat pump (GHP) tax credits through 2023. The Energy Efficiency Property Tax Credit (residential credit) for GHPs is extended for two years at its current level of 26% of total installation cost. In 2023, the credit steps down to 22% and then expires on Jan. 1, 2024.

Other details that likely will continue to apply:

  • There is no limit to the credit amount
  • It can be used to offset Alternative Minimum Tax (AMT)
  • The credit can be used in more than one year
  • It can be combined with solar and wind tax credits
  • And it can be combined with energy-efficiency upgrade credits

Find more information about eligibility and find Federal Form 5695 on the Internal Revenue website.

Iowa Tax Credit
The Iowa Geothermal Tax Credit is effectively a 5.2% credit (based on a formula of 20% of the federal residential energy-efficient property tax credit, which is 26% for tax years 2020 through 2022). The credit is available for units installed on or after Jan. 1, 2019 and is available for Iowa homeowners on Iowa residential properties. Information and links are on the Iowa Geothermal Heat Pump Tax Credit page of the Iowa Department of Revenue website. Details include:

  • Before claiming the tax credit for tax year 2019 or later, taxpayers must apply and receive approval for the credit through the Iowa Department of Revenue. Claims made on the Iowa 1040 without such award will be denied.
  • Application deadline is May 1 following the year of installation.
  • The credit is awarded on a first-come, first-served basis.
  • The total awards are capped at $1 million annually and a waitlist will be established when the annual cap is reached.
  • To apply, set up an account and have completed an application; start here (but know you’ll need your invoice and completed Federal Form 5695, the required Tax Credit Applicant Certification Form found in the Required Documentation section in the application): Tax Credit Award, Claim & Transfer Administration System (CACTAS)

Iowa Geothermal Property Tax Exemption
This tax exemption is for the value added by any new or refitted construction or installation of a geothermal heating or cooling system on residential property. Unlike other exemptions, it does not have to be applied for in the year it was first added. The exemption runs for 10 years after it is applied for. Signup deadline is February 1. See Tax Credits and Exemptions on Iowa Department of Revenue website. Scroll down to the Iowa Geothermal Heating and Cooling System Exemption listing for details and the form that must be filed.

Contact us for more details about geothermal and cooperative incentives for installing geothermal. Be sure to consult with your own tax or legal advisors about any individual tax matters relating to the tax credits associated with installing geothermal.