Geothermal Heat Pump Tax Credits

How do I take the FEDERAL Tax Credits?
  1. Make sure the proposed system meets the minimum specifications required.  The required specification for a closed loop system is: “EER ≥ 14.1 and COP ≥ 3.3.”   These numbers show efficiency of a system.
  2. Keep good records of your expenditures.  File and hold all receipts and bills of sale.
  3. Review the Tax Forms that you will need to file.  The 2010 form is not yet available, but it will be virtually the same as the 2009 version: IRS Form 5695.  Note that Part II of this form is relevant to Geothermal Heat Pumps.
  4. The rules for Form 5695 are straightforward: multiply the cost of the system by .30 (thirty percent), and take this amount as a tax credit.
  5. If your tax credit is greater than your tax liability, than you would pay no taxes for the year, and you could roll any credits not used into the following tax years, for up to 5 years
How do I take the NORTH CAROLINA Tax Credits?
  1. NC requires that “a renewable energy system must conform to all applicable state and local codes and the requirements of all inspecting jurisdictions.”  In essence this means that the installation must be fully permitted, and a licensed HVAC contractor should install new equipment.
  2. Keep your records, as noted above.
  3. Review the NC Tax Form that you will need to file.  The 2010 form is not yet available, but as the laws have not changed it will be virtually the same as the 2009 version: NC Form NC-478G.
The rules for Form NC-478G can be summarized: 
  • Multiply the cost of the system time .35 (thirty-five percent).  Take this amount as your tax credit – unless is greater than $8,400 in which case it is capped at $8,400.
  • Note that tax credits can only be used to reduce 50% of your tax liability in any year.  For example, if your NC taxes were $10,000 you could take $5,000 in credits in 2010, and any remaining in 2011.   You can roll unused credits forward for 5 years.
Worked example of Tax Credits
  • Cost of a Geothermal Heat Pump System: $25,000
  • Federal Tax Credits: .30 * $25,000 = $7,500
  • NC Tax Credits: .35 * 25,000 = $8,750.  However this is above the cap, so the credit is $8,400
  • Cost after credits: $25,000 -$7,500 - $8,400 = 9,100

Notes:

  • Tax Credits are like cash from the government.  For example, if your Federal Tax Credit was $7,500 and you owed the Federal Government $9,000 in taxes your bill would be reduced to $1,500. 
  • A tax credit is far superior to a tax deduction.  A tax credit of $7,500 = $7,500 in cash.  (A tax deduction of $7,500 is only worth about $2,100 to the average tax payer.)
  • If you have had income tax withheld, than a large tax credit typically results in a large tax refund.
  • The NC tax credits are set to expire at that end of 2015.  The Federal tax credits are set to expire in 2016.
  • State taxes are a deductible expense from your federal taxes.  By taking a $8,400 NC tax credit you are reducing this tax reduction.  This may increase your federal taxes by .28 * $8,400 = $2,352 – but this is dependent upon your tax rate.
  • Please see your tax adviser to understand how the credits will work for you.
References:
To check COP and EER requirements: www.energystar.gov/index.cfm?c=tax_credits.tx_index
To check Tax Credit Rules: www.dsireusa.org/