The §25D Geothermal Tax Credit: 30% Through 2032 (and Why It Survived the §25C Repeal)

The federal incentive landscape for heat pumps changed in a meaningful way at the end of 2025. The §25C Energy Efficient Home Improvement Credit — the $2,000-per-year credit that air-source heat pump buyers had been using — was repealed by the One Big Beautiful Bill, effective for property placed in service after December 31, 2025. The §25D Residential Clean Energy Credit, which covers geothermal heat pumps, was not repealed. It continues at 30% of qualifying cost through 2032, with no dollar cap, and steps down only after that. For homeowners weighing a ground-source system in 2026, §25D is now the most generous federal credit still on the table — and the gap between geothermal and air-source incentive math has widened materially. This post walks through what §25D actually covers, who qualifies, how to claim it, and how it stacks with state and utility programs.

What §25D is — in one paragraph

§25D is a federal income tax credit equal to 30% of the qualifying cost of installing a residential clean energy system. Eligible systems include geothermal (ground-source) heat pumps, solar PV, solar water heating, small wind, fuel cells, and battery storage. For geothermal specifically, the credit is 30% through 2032, drops to 26% in 2033, drops to 22% in 2034, and expires for property placed in service after December 31, 2034. There is no annual cap and no lifetime cap. There is no income limit. The credit is nonrefundable — you can't get more back than your federal income tax liability for the year — but any unused portion can be carried forward to future tax years until used up. It is claimed on IRS Form 5695, attached to your annual Form 1040.

Why §25D survived and §25C didn't

§25C and §25D were enacted together in the Inflation Reduction Act of 2022 but address different markets. §25C was the workhorse for everyday efficiency upgrades — air-source heat pumps, heat pump water heaters, insulation, windows, electrical panels — with relatively low per-item caps that added up to $3,200 a year. §25D was always the heavier credit for capital-intensive on-site generation and storage, with no dollar cap because the underlying installs cost much more. When the OBBB was negotiated, §25C was on the chopping block as a cost-control measure but §25D was preserved through 2034 (with the original step-down schedule unchanged), in part because removing it would have stranded ongoing solar and geothermal projects mid-installation. The practical result: an air-source heat pump installed in 2026 gets no federal tax credit; a geothermal heat pump installed in 2026 still gets the full 30%. For a $35,000 geothermal install, that's a $10,500 credit. For more on the §25C repeal and what's left of the federal incentive stack, see our HEEHRA rebate guide.

What counts as a "qualifying expense"

§25D covers the full installed cost of an eligible geothermal heat pump system. That explicitly includes the equipment itself, but also the labor for on-site preparation, assembly, and installation, and any piping or wiring that connects the system to the home. For geothermal specifically — and this is the part that matters financially — the ground loop counts. Drilling vertical bores, trenching horizontal loops, the loop pipe itself, the grout, the antifreeze, the manifold, and the labor for all of it are qualifying expenses. The ground loop is typically 30–50% of total geothermal install cost, so excluding it would have gutted the credit; the IRS guidance is clear that it's in.

What does not count: structural improvements to your home that aren't part of the heat pump system (a new mechanical room, for example), routine maintenance after install, repair work on the existing HVAC system you're replacing, and any portion of the cost reimbursed by a rebate. That last one matters: if you receive a $5,000 utility rebate that is treated as a purchase-price reduction, your qualifying cost basis for §25D drops by $5,000. If the rebate is taxable income to you (rare for residential efficiency rebates, but it happens), it doesn't reduce the basis. Your installer's invoice and the rebate paperwork together tell you which treatment applies — when in doubt, ask the rebate program directly.

Eligibility: the equipment side

Two requirements on the equipment. First, it must be a geothermal (ground-source) heat pump as defined in the statute — meaning it uses the ground, ground water, or a body of water as a thermal energy source to heat the home or as a thermal sink to cool it. Air-source heat pumps don't qualify for §25D regardless of efficiency rating. Second, the system must meet the ENERGY STAR Geothermal Heat Pump Program requirements in effect at the time of purchase. ENERGY STAR requirements differ by loop type (closed-loop vs. open-loop, water-to-air vs. water-to-water) and are updated periodically; your installer or distributor can pull the certified-product entry for the specific model.

The certification check is a real eligibility gate, not paperwork theater. If you install a high-efficiency geothermal system that happens to lack ENERGY STAR certification — sometimes the case with imported equipment or older inventory — §25D does not apply. Before you sign a quote, get the AHRI certificate and confirm the model is listed as ENERGY STAR certified at energystar.gov/productfinder/. Save the printout — it's the documentation you'll need if the IRS asks.

Eligibility: the home side

§25D is for residential use. The home must be located in the United States and used as a residence by the taxpayer — but unlike many other credits, it does not have to be your principal residence. A second home or vacation home you use personally qualifies. Rental properties you don't live in do not qualify under §25D (different credits apply for landlord installs, but they're outside scope here). New construction qualifies as long as the system is placed in service after construction is complete and you take occupancy as a residence.

The credit goes to the person who paid for the system and owns the property. If you finance the install with a loan, that's fine — the cost basis is the full purchase price including financed amounts, and you claim the credit in the tax year the system is placed in service (operational and inspected, not just paid for). Closing on a new home with the geothermal already installed by the builder is a special case: the credit can sometimes pass to the buyer if the builder didn't claim it, but you'll need a written allocation from the builder and a clear statement of the system's qualifying cost.

How to claim it: the actual workflow

Claiming §25D adds one form to your annual tax filing. The sequence:

1. Keep the documentation. The four items the IRS wants to see, in order of importance: the installer's itemized invoice showing total cost broken out by equipment, labor, and ground loop; the AHRI certificate matching the indoor and outdoor units; the ENERGY STAR certification confirmation for the model; and proof of payment. Most installers will assemble this packet for you on request — ask for it at install completion, not six months later.

2. Determine the qualifying cost basis. Start with total invoice cost. Subtract any rebates that reduce purchase price (state, utility, or federal grant programs). Do not subtract sales tax — sales tax on the equipment is qualifying. The result is your §25D basis.

3. File Form 5695. Form 5695 is the Residential Energy Credits form. For §25D, you'll enter the qualifying cost basis on the geothermal heat pump line in Part I, multiply by 0.30 to compute the credit, and carry the result to Schedule 3 of Form 1040. If the credit exceeds your tax liability, the unused portion carries forward; Form 5695 in subsequent years has a line for prior-year carryforward.

4. Hold documentation for at least three years. The IRS audit window for the credit is generally three years from filing, longer in cases of substantial understatement. Keep the install packet with your tax records, not in the basement next to the unit.

Stacking with state and utility programs

§25D is a federal tax credit. It does not conflict with state rebates, utility rebates, or state tax credits — those operate independently and can be claimed in addition. The only interaction is the cost-basis reduction described above: if a state or utility rebate is structured as a purchase-price reduction, your §25D basis drops by that amount. The credit on the reduced basis is still meaningful, but it's smaller than it would have been on gross cost.

Several states layer their own geothermal incentives on top of §25D. New York, Massachusetts, Maryland, and Connecticut have run state-level geothermal rebates and tax credits in recent years — programs change year-to-year, so check our state rebates index for the current status in your state. Some electric utilities also offer geothermal-specific rebates (often $1,500–$3,000) on top of state and federal incentives, particularly in territories where they're trying to grow off-peak electric load. The stacking math typically lands a $35,000 geothermal install at $20,000–$25,000 net after all incentives are applied, which is the range where the lifetime-cost case against air-source becomes hard to argue with.

The 2033–2034 step-down (and why it matters now)

§25D is at 30% through property placed in service on December 31, 2032. Starting in 2033 it drops to 26%, then 22% in 2034, then sunsets after 2034. On a $35,000 install that's a swing from $10,500 (today) to $9,100 (2033) to $7,700 (2034) to $0 (2035 and beyond). Geothermal installs routinely take 4–9 months between contract signing and place-in-service date — drilling availability is the bottleneck in most markets — so a contract signed in mid-2032 can easily slip into 2033 and lose the full 30% rate. For homeowners considering geothermal, the planning window for the maximum credit is essentially the next six years, and the further into the schedule you get, the more contract timing matters.

What to do next

Three concrete steps. First, confirm geothermal is even feasible at your property — lot size, access for drilling, and local installer availability are the three filters that knock most projects out before pricing. The heat pump basics post walks through the configuration tradeoffs. Second, get at least two quotes from installers who specialize in residential geothermal (not contractors who do one a year), and require an itemized cost breakdown plus the ENERGY STAR certified-product entry for the specific model. Third, check your state on the rebates index for stackable incentives, and run the post-incentive total against the air-source ducted alternative on the cost pages. Geothermal is rarely the cheapest install up-front; with §25D and stacked state programs, it's often the lowest total cost over a 15-year hold, and that's the comparison that should drive the decision.

This article is educational and does not constitute tax advice. Tax outcomes depend on individual circumstances. Consult a CPA or enrolled agent before relying on any specific credit calculation for your return.