Documentation Needed for a Geothermal Tax Credit

Geothermal energy – earth-based heat -- offers a clean, sustainable alternative to traditional HVAC systems. During winter months, geothermal heat pumps use an air delivery system to move heat from the ground to heat-exchanger pipes located near a building and then into the building. In summer months, the process works in reverse and can become a “free” hot water heater as warm air moving into heat-exchanger pipes can be used to heat water. In keeping with The Energy Improvement and Extension Act of 2008, installing a qualified geothermal heat pump can qualify a taxpayer for a federal tax credit until the program expires on Dec. 2016.

Scope

The geothermal tax credit allows residential customers who install a qualifying geothermal heat pump in a new or existing primary or secondary residence to take 30 percent of the cost of a geothermal system, including onsite preparation, installation and connection costs, as a credit on federal taxes. If the amount of the credit is more than the current tax liability, the taxpayer can carry it forward into the next tax year. In order to qualify, however, the geothermal system must be installed following specified procedures, meet federal Energy Star requirements and include proper documentation.

Manufacturer’s Certification Statement

A manufacturer’s certification statement is a starting point for calculating how much of the total cost of the system is eligible for the federal tax credit. The certification statement identifies components that qualify for the credit -- the heat pump itself -- but leaves out add-ons such as an emergency back-up system and duct work that do not qualify. Although the IRS does not require taxpayers to submit the certification statement with a tax return, you must keep the statement for your records.

Receipts

Keep the receipt for the unit itself and for qualifying preparation, installation and connection costs. Qualifying costs include those for labor in onsite preparation, assembly and installation of the geothermal heat system, and connection of the system via piping or wiring. Receipts must display a "placed in service" date between Jan. 1, 2008, and Dec. 31, 2016. Although the IRS does not require taxpayers to submit dated receipts with a tax return, you must keep a copy of all receipts for your records.

Tax Forms

Use the manufacturer’s certification statement and saved receipts to calculate the total costs eligible for the geothermal tax credit. Enter this amount on Line 4 of IRS Form 5695, Residential Energy Credits. Multiply the amount on Line 4 by 0.30 and enter the result on Line 9. Transfer this amount to Line 52 of IRS Form 1040. Submit Form 1040 with Form 5695 attached.

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About the Author

Based in Green Bay, Wisc., Jackie Lohrey has been writing professionally since 2009. In addition to writing web content and training manuals for small business clients and nonprofit organizations, including ERA Realtors and the Bay Area Humane Society, Lohrey also works as a finance data analyst for a global business outsourcing company.

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