How to Deduct a Geothermal System on Taxes

Get a tax credit for being energy-efficient.

Taxpayers who install geothermal heat pump systems receive a tax credit of 30 percent of the cost of the system up to $1,500. The system must be in service between Jan. 1, 2000, and Dec. 31, 2010. Tax credits are more beneficial than tax deductions because they reduce the taxes dollar for dollar, so every dollar spent on the system reduces the tax amount by the dollars spent.

Things You'll Need

• Receipts for geothermal system
• Manufacturer's certification statement

Instructions

1. Fill out Internal Revenue Service Form 5695 for Residential Energy Credits. The cost of a geothermal heat pump system is on Part 2, Line 15.

2. Check the box for Form 5695 on Form 1040, Line 52.

3. Transfer Form 5695, Part III, Line 29 to Line 52 on Form 1040. This line is the total amount of the non-business energy property credit determined in Part I, and the residential energy-efficient property credit determined in Part II.

4. File the tax return Form 1040 and Form 5695 with the IRS.

References

• U.S. Department of Energy: Tax Breaks
• Energy Star: Federal Tax Credits for Energy Efficiency
• Energy Star: FAQ - How do I apply for the tax credit? What tax form do I need?
• Internal Revenue Service: Form 5695
• IRS: Form 1040