The §25D Geothermal Tax Credit Is Gone: What the 2025 Repeal Means for Geothermal Buyers

The federal incentive landscape for heat pumps changed sharply at the end of 2025. Two separate credits used to help heat pump buyers: the §25C Energy Efficient Home Improvement Credit (up to $2,000/year for air-source heat pumps) and the §25D Residential Clean Energy Credit (30% of cost for geothermal heat pumps, solar, and battery storage). The One Big Beautiful Bill Act repealed both, effective for property placed in service after December 31, 2025. For most of 2025, coverage assumed §25D would survive on its original schedule through 2034 — that turned out not to be the case. If you are planning a geothermal install in 2026 or later, there is no federal tax credit; your incentives now come from state programs and utility rebates. This post walks through what §25D covered, who can still claim it, and where the money went.

What §25D was

§25D was a federal income tax credit equal to 30% of the qualifying cost of installing a residential clean energy system — geothermal (ground-source) heat pumps, solar PV, solar water heating, small wind, fuel cells, and battery storage. For geothermal, the credit covered the full installed cost including the ground loop (typically 30–50% of the total), with no annual cap, no lifetime cap, and no income limit. It was nonrefundable but any unused portion could be carried forward. On a $35,000 geothermal install, that was a $10,500 credit — which is why removing it changes the geothermal cost case so much.

What the repeal changed

§25C and §25D were enacted together in the Inflation Reduction Act of 2022. The One Big Beautiful Bill Act, signed July 4, 2025, moved up the termination date for both credits to December 31, 2025. The operative test for §25D is the placed-in-service date: under IRC §25D, an expenditure is treated as made when the original installation is completed. So a geothermal system whose installation was completed on or before December 31, 2025 can still claim the 30% credit on a 2025 return; a system placed in service on or after January 1, 2026 cannot claim it at all. There is no phase-down for geothermal — it went from 30% to nothing at the year boundary. For more on what is left of the federal picture, see our HEEHRA rebate guide.

Who can still claim it

Two groups. First, homeowners whose geothermal system was placed in service(operational and inspected, not merely paid for or contracted) on or before December 31, 2025 — they claim the credit on their 2025 federal return, filed in 2026, using IRS Form 5695. Second, taxpayers who made qualifying §25D expenditures before the end of 2025 but could not use the full credit because it exceeded their tax liability: under current rules, unused amounts carry forward to future tax years until used up. If either applies to you, the documentation and filing workflow below still matters.

If you qualify for a 2025 install: how to claim it

1. Keep the documentation. The items the IRS wants to see: 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 Geothermal Heat Pump Program certification for the model; and proof of payment. The system also had to meet ENERGY STAR requirements in effect at the time of purchase — air-source heat pumps never qualified for §25D regardless of efficiency.

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

3. File Form 5695. Enter the qualifying cost basis on the geothermal heat pump line in Part I, multiply by 0.30, 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 is generally three years from filing, longer in cases of substantial understatement.

What geothermal buyers can use in 2026 instead

The federal credit is gone, but geothermal still stacks well at the state and utility level — in several states the local incentives are now the entire value proposition. Some states run their own geothermal tax credits that are independent of the federal repeal: New York offers a 25% state credit (up to $10,000) and New Mexico a refundable 30% credit (up to $9,000, through 2034), among others. Massachusetts, Maryland, and Connecticut have run state-level geothermal rebates in recent years. Many electric utilities also offer geothermal-specific rebates (often $1,500–$3,000), particularly in territories trying to grow off-peak electric load. Income-qualified households may also be able to layer HEEHRA where their state program is still funded. Check the current status for your state on our state rebates index — every program there carries a last-verified date.

What to do next

First, confirm geothermal is feasible at your property — lot size, drilling access, and local installer availability knock most projects out before pricing. Our heat pump basics post covers the configuration tradeoffs. Second, get at least two quotes from installers who specialize in residential geothermal, with an itemized cost breakdown. Third, check your state on the rebates index for stackable state and utility incentives, and run the post-incentive total against the air-source alternative on the cost pages. Without the federal credit, the geothermal case now rests on operating-cost savings over a long hold plus whatever state and utility incentives your area offers — so the local-incentive check is more important than ever.

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.