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In October 2008, geothermal heat pumps were added to section 25D of the Internal Revenue
Code, which provides a 30% tax credit for spending on qualified property placed in service
through the end of 2016. The credit was made retroactive to the beginning of 2008, ans was
capped at $2,000. In February 2009, the $2,000 cap was removed for property placed in service
after December 31, 2008.
The Tax credit may be claimed for spending on "qualified geothermal heat pump property"
installed in connection with a new or existing dwelling unit located in the United States and used
as a residence by the taxpayer. It does not have to be the primary residence.

The term "qualified geothermal heat pump property" means any equipment which --

(i) uses the ground or ground water as a thermal energy source to heat the dwelling unit or as a
thermal energy sink to cool the dwelling unit, and

(ii) meets the requirements of the Energy Star program which are in effect at the time that the
equipment is installed.

Spending for labor costs properly allocable to the installation of the geothermal heat pump
property and for any associated piping, wiring, and ducting are included.
The credit cannot be claimed on spending for equipment used solely to heat a swimming pool or
hot tub, or on previously used equipment.
The credit can only be claimed on spending for property that is "placed in service" during the
period from 2008 to 2016. In general, property is considered to be placed in service when the
original installation is completed. However, if the geothermal heat pump property is part of the
construction or reconstruction of a house, it is considered to be placed in service when the
taxpayer takes up residence in the new or renovated house.
An individual can claim a tax credit equal to 30% of spending on qualified geothermal heat pump
property. For property placed in service during 2008, the maximum tax credit is capped at
$2,000 (30% of the first $6,667 in spending). For property placed in service after January 2,
1009, there is no limit on the amount of the tax credit that can be claimed. The tax credit can be
used to offset both regular income taxes and alternative minimum taxes (AMT). If the tax credit
exceeds the income tax liability, the remaining balance can be carried forward into future years.
A corporation usually owns cooperative apartment buildings, and the residents are shareholders
in the corporation. If the corporation spends money on installing qualified geothermal heat pump
property, each shareholder is allowed to claim a tax credit on his or her share of the spending.

Owners of condominiums contribute to the upkeep of the condominiums by paying money to a
condominium management association. Where such a management association spends money
on installing qualified geothermal heat pump property, each member of the association can
claim a tax credit on his or her share of that spending. However, the association must qualify as
a "homeowners' association" under section 528(c)(1) of the tax code, and "substantially all" of
the units in the condominium project must be used as residences.
Amounts that are spent on improvements are added to the tax basis of the house. A higher tax
basis generally means there is a smaller taxable gain when a house is later sold. Spending on
geothermal heat pump property adds to the tax basis, but must be reduced by the amount of the
tax credit received.
If a dwelling unit serves a dual purpose, such as for a home office in the dwelling, the spending
may have to be allocated between residential and business use. If the portion considered
residential spending is at least 80%, then al the spending qualifies for the residential credit.
There is a 10% tax credit available for business use of geothermal heat pump property, and
5-year MACRS accelerated depreciation.
IRS Form 5695 (2008) is used to claim the Residential Energy Efficient Property Credit for
2008. Form 5695 for 2009 has not been published yet.
Non-Business Energy Property Credit for Existing Homes

Section 25C of the Internal Revenue Code provides a 30% tax credit for spending on qualified
energy efficiency improvements made to an existing home during 2009 and 2010. The maximum
credit is capped at $1,500. The improvements include qualified insulation, windows, doors, and
solar reflective roofing materials. The improvements must be installed in or on a dwelling unit
located in the United States that is owned by the taxpayer and used as the principal residence.
IRS Form 5695 (2009) is used to claim the credit. From 5695 for 2009 has not been published
yet.

New Energy Efficient Home Credit

Section 45L of the Internal Revenue Code provides building contractors a $2,000 tax credit for
the construction or substantial renovation of a new home that achieves a 50% heating and
cooling energy cost saving relative to a comparable dwelling that meets the minimum
requirements of 2004 IECC energy code. The home must be sold prior to the end of 2009 for the
builder to receive the credit. The energy consumption reduction must be verified by and
independent accredited certifier, such as a RESNET home energy rater. IRS Form 8908 is used
to claim the credit. IRS  Notice 2008-35 provides detailed guidance.