Water Source Heat Pump Tax Credit

It has been well publicized that money spent on single or multiple products to update the energy efficiency of your principal residence allows you a tax credit enacted 2009 by the IRS. Over a two year period you can claim a maximum of $1,500 (2009 & 2010). Basically you can spend up to $5,000 during this 2 year period on energy efficient improvement for your principal residence that you own and live in, and get 30% or $1,500 (30% of $5,000 = $1,500) back as a tax credit. If you get the entire $1,500 credit in 2009, then you can’t get anything additional in 2010.

What has not been publicized is that Water Source Heat Pumps are an exception. The $1,500 maximum does not apply to geothermal heat pumps, solar water heaters, solar panels, fuel cells, and wind generators. These are all eligible for a 30% tax credit with no upper limit. The tax credit with no upper limit is completely separate from the one limited to $1,500, so you can get both. For example, you can get $1,500 back for new windows, and $3,000 back for a new geothermal heat pump for a total tax credit of 4,500. Since these are “non-refundable” tax credit, you can’t get more back in tax credits than you pay in federal income tax. Also only the tax credits that are not limited to the $1,500 cap can be carried forward to future years.

The tax can not be claimed until the property is ready and available for use; this is called, “placed in service”. It’s not when you purchase product, but the day installation is complete, and you are able to use your new product.

Even though the installation price of a Water Source Heat Pump system can be several times that of other systems of the same heating and cooling capacity, the additional costs are returned to you in energy savings in 5-10 years. The “no upper limit” feature of the tax credit of 30% will also shorten the payback of this initial cost.