Show me the money! (How the geothermal tax credit works)

After spending hours trolling various websites, two phone calls, one to EnergyStar and one to the IRS, I have finally confirmed that the 30% tax credit applies to the installation of the ENTIRE system NOT just the heat pump. That will amount to about $7,800 of awesomeness come February 2013 when I do our taxes.

My original hunt for verifiable information made it obvious that finding a definitive answer to the question “What does the 30% tax break apply to?” was not going to be easy. Some websites use language that indicate the whole installation is eligible for the tax break, some are very specific in their mention of the “heat pump” when referring to the tax break. EnergyStar’s Federal Tax Credits for Consumer Energy Efficiency page has in small print on a secondary page that installation is included. I decided to be that annoying person who calls with a question that is already answered for them. The conversation went like this:

Me: “Hello, I was just calling to confirm that the 30% tax credit for geothermal systems includes the installation costs and not just the heat pump.”

EnergyStar Man: “Yes, that includes the whole system.” 

Me: “I saw that on your website but just wanted to clarify that it includes the loops, digging, excavation and all the other things that go along with installing the system.”

EnergyStar Man: “Ummmmmm…I think, but you should call the IRS just to make sure.”

Me: “Ummm, okay, so how do I do that…just call up the IRS?”

EnergyStar Man: “Yes and they will be able to tell you specifically what is eligible.” 

I am sure this conversation would drive the hubby crazy because he hates that I ask too many questions. He really hates it when I ask questions that we seemingly already know the answer to, but I like to be super thorough when dealing with insurance, realtors, banks, loans, purchases of really expensive products and directions when lost in the middle of NYC. So I called the IRS. After an extended wait and about 7 holds I was put through to Mrs. Sneed (sidenote: perfect name for an IRS agent). She asked me about 30 questions, which included “Is the house in the United States?” and “Will you be using this system to heat a pool or hot tub?” (There was an awkward pause when I answered “I wish.”)

To sum up her 30 questions:

  • you must own the home where you are installing geothermal (and it must be in the US)
  • you CANNOT be receiving any other subsidies or credits from your local government or other entities
  • the system must be EnergyStar approved
  • you must be heating your house, not a pool or hot tub
If you meet all of these requirements and are installing it in 2012 you are eligible for the 30% tax credit and that covers the ENTIRE cost of the installation and materials. The other awesome thing about the credit is that you can split it up if needed. For example, if when I do our taxes in February we owe less than what the credit is, we can carry over the difference to 2013 tax return. I think that is how she explained it. I suggest calling the IRS to confirm if you are thinking of installing a geothermal system just to be sure :).

The Heat Beneath…or “How Geothermal Works”

Pennsylvania is a four season state, which is one of the reasons it is a great place to live. Even though the temperatures fluctuate above ground, the temperature about 8-10 feet below the surface stays around 50°F (http://extension.psu.edu/energy/geothermal-energy). While 50°F sounds cold in actuality it is 50 degrees of heat energy that geothermal systems move to heat or cool your house. One unifying theme that I try to burn into my science students’ heads is that “energy” likes to move from area of higher concentration to lower concentration, this same concept is what drives the really complicated and hard to explain condensers, loops and heat pumps. The simplified explanation is that the heat is moved from the ground into your house in the winter, and from your house to the ground in the winter. I was going to try to write a post that was all scientific and sexy to get folks really excited about geothermal but instead I think the easiest way to explain it is to check out these awesome graphics Mike Armstrong created for Morrison Inc. Tomorrow I will have information about what tax breaks and incentives are available for people who install this type of system. Anyone have any experience with geothermal? What do you think the pros and cons are?

How Geothermal Heats Your House, Image courtesy of Mike Armstrong of Morrison Inc.,http://www.morrisongeothermal.com/Morrison_Geothermal/How_they_Work.html

Why We Chose Geothermal

The renovation process has not been the most peaceful experience. I would like the internets to believe that the hubby and I operate in a mature and loving manner at all times, even when we disagree. Unfortunately, we know lots of people who have access to this blog, through the internet, that know us. I do not want to ruin my credibility, so I will admit right now that there have been AT LEAST 1000 things we have argued over (last night’s lively debate over wooden floors ups that number to 1001). These things include small things, big things and things that have not even happened yet (even those that may never happen-like where to place the 15-year plan in-ground pool). However, one thing we have both agreed on is that we wanted to renovate the house in a way that will support our tree-hugging tendencies. Making the decision about what heating and cooling system to install was an easy one for us; we knew immediately we wanted to invest in geothermal.

There are two things people usually say to us when we tell them we are installing geothermal:

1.) Isn’t that expensive?

2.) Don’t you get a great a tax-break on that?

Answer to #1: Since we take baths in $100 bills, the answer to the first question is always “no.” In all seriousness, to us the cost was not a big issue, not because we are rich but because we are firm believers in putting your money where your mouth is. Our mouths have a tendency to rant and rage about America’s addiction to oil and the ridiculous billion dollar profits the oil companies make every year.  Geothermal systems do not rely on oil or any other fossil fuels (in theory you could debate this since they do use some electricity to operate), have low-emissions and last for a long time (20-50 years depending on the source of information). Geothermal has a high up-front cost but a very low operating cost. We had estimates from a few different companies and ended up choosing Morrison Inc. because of their incredibly detailed estimate came in below the other companies and because the hubby liked how informative, Mike, the salesman was. Morrison Inc. has been installing geothermal systems since 1980 and are located out of Duncannon, PA. Their total bid from last August was a little less than $26,000 for a 5-ton, vertical loop system. That includes excavation, drilling, ductwork, labor and all the other parts that allow you to walk into a climate-controlled house. If you would like more specifics, please email me and I can provide them. The cost can vary depending on the size of your house, the terrain, existing insulation, etc. The most important thing to stress about the cost of geothermal is that it is front-loaded. The number of years it takes for the system to pay for itself varies, but typically the operating costs are about 45% less from traditional fossil-fuel based systems.

Answer to #2: Yes, you do get a tax break. I am still getting clarification on how that tax break specifically works. The way I understand it is that there was legislation passed by Congress in 2009 that offers homeowners a tax credit of 30% if a system is installed by  Dec. 31, 2016. I am still trying to determine if that 30% is on the pump or on the entire cost of the system. I also understand that there are additional incentives depending on your state and power company. I am working on a later post that will detail the specific savings and tax-breaks you can get when installing a geothermal system in Pennsylvania.

At this point we have only had the ductwork installed. We want to pay for that and then have the rest of the system installed. The system we are putting in includes the heating and cooling of the attic (it will be converted to a guest room or office space); that did increase the cost a bit. Based on the Afghanistan like temperatures we experienced when trucking 100 boxes of stuff from the second floor to the attic this weekend the investment was necessary. The system will hopefully be in and running before the cold weather hits. If not we will just throw another layer on and get another dog to keep the bed warm. Stay tuned tomorrow for an explanation of geothermal works to heat and cool your house!