Geothermal heat pumps (GHPs) are some of the most energy-efficient HVAC systems on the market, but they’re also among the most expensive. While most people pay about $20,000 for their geothermal systems, they can cost more than $40,000 in extreme cases. These steep installation costs make geothermal systems unattainable for many homeowners.
Luckily, many tax incentives and rebate programs can make these expenditures more manageable. The federal government offers the most significant of these incentives, but there are also state incentives you can apply for depending on eligibility.
Keep reading, and we’ll help you navigate the world of geothermal incentives so you can afford one of these fantastic systems for a new or existing home.
What is a geothermal heat pump?
A geothermal heat pump system, also called a ground source heat pump, is a highly efficient HVAC system that heats your home in winter and cools it in summer. With a geothermal heat pump in your home, you no longer need an air conditioner and a furnace. A GHP accomplishes the tasks of both appliances.
It does this using a fundamental principle of physics: heat transfer. Hot objects and substances always bleed their heat into cooler objects and substances. For example, when you pour yourself a glass of water with ice, the warmth in the water moves into the ice cube, melting it. At the same time, the water cools as it loses its heat.
To monopolize on this principle, GHPs utilize the ground surrounding a home as a heat source and a heat sink, depending on what’s needed. This works because the ground temperature is cooler than the air temperature in summer and warmer than the air temperature in winter.
GHPs access the ground's relative temperature using tubes filled with fluid. Some of these tubes are buried deep under the ground outside a home, connecting to tubes inside the home. When you set your thermostat to cool your home, your heat pump pulls heat out of the air using the fluid in the tubes and then sends the fluid out beneath the ground, where it dispels the heat. Then, the cooled fluid flows back inside to pull more heat out of your home. This cools your entire home by removing warmth.
In winter, the geothermal equipment operates in reverse to warm your home. It uses the ground as a thermal energy source and pulls heat out of the ground using the same pipes and fluid it uses in summer. When the fluid in the pipes beneath the ground gets warm, the system draws it into your home, releasing the heat into your ductwork and creating heated airflow.
Because this type of system relies on existing heat instead of burning fuel to generate heat, it’s incredibly efficient. For every kilowatt hour (kWh) of electricity the system uses during operation, it generates between three and five kWh of heat energy. Alternative heating and cooling systems like air conditioners and propane or natural gas furnaces are up to 65% less efficient.
This means that replacing your old HVAC system with a GHP can significantly reduce your energy consumption, reduce your carbon footprint, and even save you money on your power bills. In fact, the US Department of Energy estimates that GHPs often pay themselves off in energy savings within 10 years.
How much do geothermal heat pumps cost?
On average, installing a geothermal heat pump costs about $20,000 before applying any incentives. However, depending on factors like the square feet of your home, the type of system you get, where you live, and how difficult your system is to install, this project could cost anywhere between $3,000 and $45,000.
To learn exactly how much a GHP will cost you, get a quote from a GHP installer today.
The federal geothermal tax credit
The Residential Clean Energy Tax Credit, part of the Inflation Reduction Act, is the single largest incentive for homeowners looking to buy a geothermal system. This incentive provides you with a federal tax credit of up to 30% of the total cost of your system if you install it between now and 2033. This is the same tax credit you can apply for when installing renewable energy equipment like solar panels.
Through this program, you can get credited up to 30% of your system’s costs during the next applicable tax season, making your federal taxes far more favorable. For example, if your system costs $20,000 to install, you’d get credited $6,000 on your taxes. So, if you owed $7,000 to the government, the credit would expunge all but $1,000.
Unfortunately, this only works for the tax liability. It won’t increase the size of your tax return if the government owes you money. But the good news is that if your credit is larger than what you owe, the remainder of your credit rolls over to the following year’s taxes. So while this incentive doesn’t mean you’ll actually get a cash refund, it helps you recoup some of your system’s costs.
Remember that only GHPs that meet specific Energy Star requirements are eligible for this tax credit, so make sure you choose an Energy Star-certified GHP.
How to apply for the federal tax credit
To apply for the residential energy tax credit, you need to fill out and submit IRS form 5695 when you’re filing your taxes. As with all tax-related documents, this form can be somewhat tricky to navigate correctly, so we recommend working with a tax professional when you submit it.
Other geothermal heat pump incentives
In addition to the federal tax credit, there’s also a wide selection of geothermal incentives offered by state and local governments. Most of these incentives won’t net you as much savings as the federal one, but they can still make your GHP much more affordable.
In fact, you can often double dip by applying for a local incentive as well as the federal one. This will allow you to recoup even more money than any single incentive could save you. This may not always be an option, though, so be sure to check the fine print of any incentive you’re interested in.
To find the geothermal incentives your local government offers, speak to a geothermal installation company in your area. They’ll have the scoop. Alternatively, you can search for local incentives by visiting the N.C. Clean Energy Technology Center’s DSIRE database. This database tracks and catalogs every state’s incentives for renewable energy and energy-efficient equipment.
Go geothermal without going broke
The unbeatable efficiency of geothermal heat pumps makes them an excellent alternative to traditional HVAC systems. They can make your home more environmentally friendly, and they can even save you money in the long run by lowering your power bills. If you can afford the steep upfront costs, that is. Luckily, with the federal tax incentive and maybe a local incentive to boot, getting a GHP for your home may be more affordable than you think.
Joe is a home improvement expert and content specialist for Fixr.com. He’s been writing home services content for over eight years, leveraging his research and composition skills to produce consumer-minded articles that demystify everything from moving to remodeling. His work has been sourced by various news sources and business journals, including Nasdaq.com and USA Today. When he isn’t writing about home improvement or climate issues, Joe can be found in bookstores and record shops.