The Federal Geothermal Tax Credit: What Changed in 2026 and What It Means for You

The Short Version (Read This First)

If you're in a hurry, here's what you need to know:

• The 30% federal geothermal tax credit is gone for new installs. The residential credit under Section 25D ended for expenditures made after December 31, 2025, thanks to the One Big Beautiful Bill Act (OBBBA), signed July 4, 2025.
• If you installed in 2025, you can still claim it. File Form 5695 with your 2025 tax return. Don't leave that money on the table.
• Commercial properties still have access to credits. Section 48E is alive and covers geothermal power projects.
• Some states still have their own incentives. New York, South Carolina, and others have state-level programs that don't depend on the federal credit.
• Pending legislation might bring it back. H.R. 6873 is in committee, but don't hold your breath — or plan around it.

If you want the full story — why this happened, what the credit meant financially, what options you still have, and what comes next — read on. This is the guide we wish existed when everything started changing.

The History: From EPAct 2005 to the IRA

The federal geothermal tax credit didn't appear out of nowhere in 2022. It has a long history that's worth understanding, because that history explains both why the industry came to depend on it so heavily — and why its sudden removal hit so hard.

EPAct 2005: The Original Credit

The Energy Policy Act of 2005 (EPAct 2005) created Section 25D of the Internal Revenue Code, establishing the first residential clean energy tax credit. Geothermal heat pumps were included from the start. The original credit was 30% of qualifying costs, but it had caps and an expiration date — typical of how Congress handles incentive programs when it's not sure yet how long it wants to commit.

Over the next seventeen years, Congress extended and modified the credit multiple times. There were years when the credit was strong, years when it was set to expire and then renewed at the last minute, and years when the industry operated under genuine uncertainty about whether the incentive would still exist by the time projects were complete. Anyone who's been in the geothermal business for more than a decade has lived through at least one panic about impending credit expiration.

The Inflation Reduction Act: Finally, Stability

Then came the Inflation Reduction Act of 2022 (IRA), signed in August of that year. The IRA rewrote Section 25D in a meaningful way. It didn't just extend the geothermal credit — it reframed the entire residential clean energy credit structure and set out a clear schedule that ran through 2034:

• 30% for systems installed 2022 through 2032
• 26% for systems installed in 2033
• 22% for systems installed in 2034
• 0% starting 2035

No caps on the credit amount. The 30% applied to the full cost of the system — equipment, installation labor, drilling, trenching, everything that qualified. For an industry that had spent years operating under year-to-year uncertainty, a decade-long runway was transformative. Installers hired. Manufacturers expanded. Homeowners started planning multi-year projects.

The IRA's geothermal provisions covered more than just heat pumps — the credit applied to solar, solar thermal, fuel cells, small wind, and battery storage as well. But for the geothermal industry specifically, the IRA felt like a genuine turning point. The International Ground Source Heat Pump Association (IGSHPA) and other trade groups described it as one of the most significant boosts to residential geothermal demand in the technology's history.

That didn't last as long as anyone hoped.

What the Credit Was Actually Worth

Before we get into what happened, let's be concrete about what was at stake financially. The 30% credit is easy to say but harder to feel until you put real numbers on it.

Residential geothermal installations in 2025 typically ran anywhere from $20,000 to $50,000 or more depending on system type, loop design, and site conditions — with vertical drilling projects sometimes pushing higher. (See our full cost guide for the breakdown by system type and home size.)

Here's what a 30% credit meant in real dollars:

That's not a coupon. That's a dollar-for-dollar reduction in what you owe to the IRS. The credit is non-refundable — meaning it can't exceed your tax liability in a given year — but any unused portion carries forward to the next year. For most homeowners with moderate to high incomes, the full credit was usable within a year or two.

The credit also had no dollar cap. Unlike some earlier iterations of Section 25D, the IRA version had no maximum — so a $60,000 vertical-bore system qualified for an $18,000 credit just as cleanly as a $20,000 horizontal project qualified for $6,000.

The payback math on geothermal depends heavily on local energy costs, your incumbent heating fuel, and your climate. The DOE's Energy Saver program estimates the incremental cost of geothermal over alternative systems can be recovered in roughly 5 to 10 years depending on energy prices and incentives. The 30% credit effectively front-loaded years of that payback on day one. Removing it doesn't change the underlying physics of geothermal's efficiency advantage — but it does materially change the financial calculus for new buyers.

The OBBBA: How the Credit Got Killed

On July 4, 2025, President Trump signed the One Big Beautiful Bill Act (OBBBA) into law as Public Law 119-21. The legislation is a sweeping piece of fiscal policy covering everything from tax cuts to spending reforms. Buried within it are provisions that accelerated the termination of a range of clean energy tax credits — including Section 25D.

Under the OBBBA, Section 25D is not allowed for expenditures made after December 31, 2025. That's it. No phasedown. No grace period. The credit that the IRA had scheduled to run at 30% through 2032 was cut off approximately seven years early.

The IRS confirmed this on its Residential Clean Energy Credit page, which now states clearly that the credit "equals 30% of the costs of new, qualified clean energy property for your home installed anytime from 2022 through December 31, 2025" and that it "is not available for any property placed in service after December 31, 2025."

The IRS also published information about the OBBBA's clean energy provisions at IRS.gov, which reflects the same termination date.

If you've been reading our earlier news coverage, you may remember that there was a period of genuine confusion — the IRS website briefly appeared to contain contradictory language about the credit's timeline. That confusion has largely resolved. The law is clear: the OBBBA ended Section 25D for post-2025 expenditures, and the IRS guidance now reflects that consistently.

Why This Matters More Than a Typical Credit Expiration

Credits expire all the time. What made the OBBBA different is that it reversed a specific, long-term legislative commitment. When the IRA passed in 2022, it wasn't just extending an existing credit — it was making a ten-year promise. Homeowners started planning around it. Manufacturers made investment decisions around it. Contractors hired and trained workers around it. The OBBBA didn't just let a credit lapse — it retroactively shortened the runway that the IRA had established.

That distinction matters if you're thinking about the political and industry context. The people most affected aren't just homeowners who missed the deadline — they're the businesses and workers who built capacity in anticipation of a decade of demand, now having to recalibrate under very different assumptions.

How to Claim the Credit for 2025 Installs

If you had a geothermal heat pump system placed in service by December 31, 2025, you can still claim the 30% credit. The cutoff is about the expenditure date and placed-in-service date — not when you file. This section is for you.

The Form You Need: Form 5695

You'll claim the credit on IRS Form 5695, Residential Energy Credits. File it with your 2025 federal tax return. The 2025 instructions for Form 5695 (also available as a PDF from IRS.gov) are your authoritative guide to the mechanics.

Geothermal heat pump property is entered on Line 4 of the form. The instructions specify what qualifies — the system needs to meet ENERGY STAR requirements for geothermal heat pumps (or equivalent efficiency standards outlined in the tax code).

What Costs Qualify

The 30% credit applies to the full cost of qualifying geothermal heat pump property, which generally includes:

• The heat pump unit itself
• Ground loop installation (trenching, drilling, piping)
• Labor costs for on-site installation
• Associated equipment (pumps, controls, flushing, commissioning)

Costs for ancillary work that isn't specifically part of the geothermal system — like replacing ductwork in a room that didn't need it for the geothermal install, or a panel upgrade that would've been needed regardless — may or may not qualify. This is exactly the kind of question where a tax professional's judgment matters.

The Carryforward Rule

The credit is non-refundable, meaning it can't reduce your federal tax liability below zero in any given year. If the credit is larger than what you owe in 2025, the unused portion carries forward to your 2026 return (and subsequent years). The fact that the credit no longer exists for new installs doesn't affect your ability to use carryforward amounts from prior years.

Documentation You Should Keep

The IRS doesn't require you to attach documentation to your return, but you absolutely should retain it in case of an audit:

• Contractor invoice showing itemized costs
• Manufacturer's certification statement (confirming the equipment meets the relevant efficiency standards)
• Proof of placed-in-service date (completion certificate, final inspection, or dated contractor sign-off)
• Payment records

Keep these for at least three years from your filing date — longer if your situation involves any complexity.

Filing Deadline

You claim this on your 2025 return, due April 15, 2026 (or later with an extension). If you installed in 2025 and haven't filed yet, don't miss this credit. On a $30,000 system, that's $9,000.

Commercial Properties: Section 48/48E Still Works

Here's an important distinction that often gets lost in the consumer news coverage: the OBBBA's repeal of Section 25D applies to residential installations. The commercial investment tax credit framework — primarily Section 48E — remains available for geothermal energy projects.

Section 48E: The Clean Electricity Investment Credit

For facilities placed in service after December 31, 2024, Section 48E provides the Clean Electricity Investment Credit. Geothermal power generation qualifies as a zero-emissions technology under this framework. The IRS maintains a dedicated page for the Section 48E credit, and the Treasury Department has published guidance listing geothermal as an eligible technology.

The credit structure under Section 48E is more complex than the residential 30% flat rate. The base credit rate is lower, but projects can access bonus rates by meeting prevailing wage and registered apprenticeship requirements. Projects in energy communities or low-income communities may qualify for additional adders.

Section 48: Legacy Credit for Transition Cases

The legacy Section 48 credit — the longstanding commercial ITC — also remains relevant for certain geothermal projects, particularly those that began construction within defined windows. The statutory text of Section 48 governs these cases. If you're working on a commercial project that started construction before Section 48E took effect, you'll want to work through the timing rules carefully with a tax professional.

Who This Affects

If you're a commercial property owner, developer, agricultural operation, or municipality considering geothermal — the federal incentive landscape is still meaningfully different from the residential side. It's more complex, involves wage requirements, and needs careful structuring. But it hasn't been zeroed out the way Section 25D has been.

Certain tax-exempt entities — municipalities, tribal governments, rural cooperatives — may also be eligible for direct pay options (elective payment in lieu of the credit), which effectively converts the credit into a Treasury payment. This makes the commercial framework accessible to entities that can't use tax credits.

State Credits and Incentives That Still Apply

The federal credit is gone for new residential installs, but that doesn't mean there's nothing left on the incentive side. A number of states have their own geothermal programs — tax credits, deductions, rebates, and property tax exemptions — that operate completely independently of what Congress does. These vary enormously by state, and they change, so always verify current availability with your state tax authority or energy office.

New York

New York offers a 25% state income tax credit for geothermal heat pump systems. Historically capped at $5,000, the program has been updated for systems placed in service on or after July 1, 2025, with a $10,000 cap under newer state guidance. The New York Department of Taxation and Finance maintains the current details. For a $40,000 system in New York, that's potentially $10,000 in state credit — a meaningful offset even without the federal 30%.

South Carolina

South Carolina offers a 25% state income tax credit for geothermal system installations. The credit is subject to South Carolina's rules around caps, carryforward periods, and applicable income types. The South Carolina Department of Revenue has current forms and guidance. South Carolina's credit stacked nicely with the federal 25D when both were available — now it's doing some of the work on its own.

Idaho

Idaho has an alternative energy device income tax deduction that may apply to geothermal installations. The Idaho Office of Energy and Mineral Resources maintains current information on state incentives. Idaho's treatment of geothermal has varied over the years, so verify current availability before relying on it.

Montana

Montana's geothermal-specific state credit was repealed after tax year 2021. The Montana Department of Revenue notes this on its repealed credits page, with carryforward treatment for prior-year credits still being worked through by some taxpayers. Montana does offer other energy-related programs — including the Alternative Energy Revolving Loan Program (AERLP) offering low-interest financing — but the dedicated geothermal credit is gone at the state level too.

Property Tax Exemptions

Many states and localities offer property tax exemptions for renewable energy improvements, which can include geothermal systems. The logic: when you install a $40,000 geothermal system, your home's assessed value may increase — and without an exemption, you'd pay property taxes on that increased value indefinitely. Property tax exemptions prevent that from happening.

The availability of these exemptions varies substantially by state and even by county or municipality. They don't appear on your income tax return — they show up (or fail to show up) on your property tax assessment. Worth looking into with your local assessor's office before assuming one way or the other.

Utility Rebates

Your electric utility may offer rebates for geothermal installations, separate from any government tax program. These programs are particularly common in states where utilities have efficiency portfolio standards that incentivize demand-side management. Programs like Massachusetts' Mass Save — which combines rebates with 0% interest financing through the HEAT Loan program (up to $25,000 at 0% for up to 7 years) — have been some of the most impactful incentive programs in the country. These programs don't depend on federal tax law and aren't affected by the OBBBA.

What This Means for the Industry

Let's be honest: the geothermal industry didn't take this well, and that's worth acknowledging.

IGSHPA and the GeoExchange Organization (GEO) were vocal opponents of the OBBBA's clean energy provisions during the legislative process. In statements released around the time of the bill's passage, industry groups described the Section 25D repeal as a significant setback for residential geothermal demand — affecting not just sales pipelines, but financing arrangements, workforce planning, and the economics of contractor businesses that had hired and trained specifically in anticipation of continued credit-driven demand.

This matters for homeowners even if you think it's just industry politics. The geothermal installation market is characterized by a relatively small number of specialized contractors — unlike, say, the air-conditioning industry where you have hundreds of local providers to choose from. A contraction in the installer base has real consequences for quote availability, project timelines, and installation quality.

There's also a longer-term concern about manufacturing investment. Geothermal heat pump equipment has been getting better and more cost-competitive with conventional HVAC over the past decade, partly because of the investment environment created by sustained credit availability. If demand softens sharply, the pace of that improvement may slow.

None of this means geothermal stops making sense economically — the efficiency advantages are real and not going anywhere. But the financial case is harder to make for some homeowners without the 30% credit, particularly those with shorter planning horizons or tighter upfront budgets. See our geothermal vs. natural gas comparison for how the numbers look in a post-25D world.

Pending Legislation: A Path Back?

There is active legislation in Congress aimed at restoring geothermal tax incentives, and it's worth knowing about — as long as you don't make financial decisions around it.

H.R. 6873: The Geothermal Tax Parity Act

The Geothermal Tax Parity Act, introduced as H.R. 6873 in the 119th Congress, has been referred to the House Committee on Ways and Means — the committee with jurisdiction over tax legislation. The bill is aimed at restoring and clarifying geothermal heat pump tax incentives, with the "tax parity" framing referring to the argument that geothermal should be treated equivalently to other clean energy technologies in the tax code.

You can track its progress through the full actions page on Congress.gov. As of March 9, 2026, the bill is in committee and has not received a floor vote. No companion Senate bill has been confirmed at this writing.

What Are the Odds?

We'll be straight with you: the odds of any standalone geothermal tax legislation passing in the current Congress are low. The OBBBA's passage reflects a clear policy direction from the current administration and congressional majority away from clean energy incentives. Restoring Section 25D would require either a significant shift in the political environment or attaching the provision to a must-pass vehicle — and there's no clear path for either right now.

That could change. Congress has reversed clean energy credit decisions before. But the honest answer is that the Geothermal Tax Parity Act is in early committee stage, passage is speculative, and homeowners should not defer installation decisions or financial planning based on a hope that it gets enacted.

If you care about this issue, contacting your congressional representatives is genuinely useful. Trade associations like IGSHPA provide resources for constituent outreach. But for planning purposes, treat the credit as gone until Congress says otherwise.

What Homeowners Should Do Now

Okay, so where does that leave you if you're considering geothermal in 2026? Here's our honest take.

1. If You Installed in 2025, File Your Taxes Correctly

This is the most urgent action item and it costs you nothing except good recordkeeping. File Form 5695 with your 2025 return. Enter your geothermal heat pump costs on Line 4. Keep your receipts. On a $30,000 system, that's $9,000. Don't leave it on the table because you assumed the credit was gone or the paperwork was complicated.

If you used a tax preparer in prior years and they didn't mention the geothermal credit, bring it up yourself. Not all general tax preparers track energy provisions closely.

2. Recalculate the Economics Without the Credit

A geothermal system that made obvious financial sense with a 30% credit may or may not still make sense without it. The answer depends heavily on your specific situation:

• What are you replacing? If you're heating with propane or oil — both of which are expensive and volatile — the savings case for geothermal is stronger than if you're replacing a newer, efficient gas furnace.
• What are your local electricity rates? Geothermal's operating costs are electric-based. If your utility rate is high, operating savings are proportionally higher. The EIA December 2025 data shows the U.S. residential average at 17.24¢/kWh, but California runs 34.71¢/kWh — that spread matters enormously for payback calculations.
• How long do you plan to stay? Ground loops last 50+ years. The heat pump unit typically runs 20–25 years. If you're selling in 3 years, the economics look very different than if this is your forever home.
• What's your upfront budget situation? Without the credit, the net day-one cost goes up $6,000–$15,000 depending on system size. Can your financing absorb that, and at what interest rate?

3. Max Out State and Utility Incentives

State incentives become more valuable precisely because the federal credit is gone. If you're in New York, that $10,000 state credit is doing a lot of heavy lifting now. If you're in Massachusetts, the Mass Save program's 0% financing is genuinely significant. Research what's available in your state before assuming there's nothing left.

4. Get Real Quotes From Qualified Contractors

The cost of a geothermal system varies more than almost any other home improvement, and the variation is site-specific. Two homes of the same size can have dramatically different installation costs depending on soil conditions, lot size, and local drilling rates. Don't use online calculators as your budget. Get at least three bids from contractors who specialize in geothermal — not HVAC generalists who do occasional geothermal jobs.

The DOE points consumers to IGSHPA's resources for finding qualified and certified installers. IGSHPA maintains an Accredited Installer credential that's worth looking for.

5. Explore Financing Options

Without the front-loaded tax credit reducing your effective cost, financing quality matters more. Options worth investigating include:

• HELOC or home equity loan — Current average HELOC rates are around 7.18% variable; home equity loans average roughly 7.84%–8.04% fixed for typical terms (Bankrate, March 2026). Not zero, but often the lowest available rate for this type of project.
• Fannie Mae HomeStyle Energy mortgage — For purchase or refinance, this program can finance geothermal improvements up to 15% of the as-completed appraised value of the home.
• State energy loans — Programs like Montana's AERLP (3.5% fixed, up to $40,000, up to 10 years) offer meaningfully below-market rates for qualifying projects.
• PACE financing — Property Assessed Clean Energy financing repaid through property tax assessments. Primarily available in California, Florida, and Missouri for residential use. Worth understanding before signing — the obligation stays with the property, not the borrower.

6. Don't Write Off Geothermal Because of the Credit

This might sound like a strange thing to say in an article about a credit that just got repealed, but it's true. The 30% credit was genuinely excellent, and its loss materially changes the financial case for some homeowners. But geothermal works on physics, not on tax policy. The efficiency advantage — typically 3 to 5 units of heat delivered per unit of electricity consumed, versus 1 unit for resistance heat or 2–3 for many air-source systems in cold weather — doesn't change based on what Congress did last July.

If you live in a climate with serious heating loads, you're replacing expensive fossil fuel, and you're planning to stay in your home for 15+ years, geothermal may still be the most economical choice over time even without the credit. Run the actual numbers for your situation before deciding.

Frequently Asked Questions

Is the federal geothermal heat pump tax credit still available in 2026?

No. The residential geothermal tax credit under Section 25D is not available for expenditures made after December 31, 2025. The OBBBA, enacted July 4, 2025, accelerated its termination. Systems installed and placed in service by December 31, 2025 can still claim the 30% credit. Systems installed in 2026 or later are not eligible for Section 25D.

What if I started my installation in 2025 but it wasn't complete until 2026?

The IRS applies the credit based on when the property was placed in service — which generally means the date the system was operational and available for use. If your system wasn't fully installed and commissioned until after December 31, 2025, the 25D credit likely doesn't apply, even if you started and made payments in 2025. This is a nuanced question worth confirming with a tax professional given your specific facts and documentation.

Can I still claim credits from prior years that I haven't fully used?

Yes. Carryforward credits from prior years (2022–2025) remain usable against future tax liability. The credit ending for new expenditures doesn't affect carryforward amounts you've already established. Check Form 5695 instructions and your prior returns for any unused credit balances.

Does the credit apply to geothermal for a rental property or second home?

Section 25D applies to a taxpayer's home, including a second home that the taxpayer uses personally. It generally does not apply to rental property that you don't use personally. Commercial rental property would instead look to Section 48/48E. The personal-use requirement has various nuances — worth confirming with your tax preparer.

Is there still a federal credit for solar panels or other clean energy in 2026?

The OBBBA's effect on other Section 25D technologies — solar, solar thermal, battery storage, fuel cells — is the same as for geothermal. The credit ended for post-2025 expenditures across the board under the OBBBA. This guide focuses on geothermal, but the framework is parallel for other residential clean energy technologies that were previously covered by Section 25D.

What's the difference between Section 25D and Section 48E?

Section 25D is (was) the residential clean energy credit — available to homeowners installing qualifying systems at their residence. Section 48E is the commercial investment tax credit — available to businesses and developers for qualifying electricity-generating facilities. A geothermal heat pump in a house falls under 25D. A geothermal power plant generating electricity falls under 48E. They have different qualification rules, rate structures, and wage requirements. Most homeowners are only affected by 25D.