25D Tax Credit Geothermal Expired

On December 31, 2025, the federal 25D tax credit for geothermal heat pumps ended after 17 years of incentivizing residential clean energy installations. Homeowners who installed qualifying geothermal systems in 2024 or 2025 claimed up to 30% of total project costs with no dollar cap—often resulting in $6,000 to $15,000 in tax savings. But the expiration doesn't mean geothermal incentives disappeared entirely.

What Was the 25D Tax Credit for Geothermal Systems and When Did It Expire?

The Section 25D Residential Clean Energy Credit provided a 30% federal income tax credit for geothermal heat pump installations completed between 2022 and 2025. The credit expired on January 1, 2026, replaced by the Inflation Reduction Act's Energy Efficient Home Improvement Credit, which maintains 30% coverage through 2032 for qualifying geothermal systems under new IRS Section 25C(d)(1) rules.

And the 25D credit covered the full installed cost of geothermal ground-source heat pumps, including equipment, labor, site preparation, and piping for homes used as primary or secondary residences. Projects completed before December 31, 2025 remain eligible for the credit when taxpayers file 2025 tax returns in 2026. So homeowners who signed contracts in 2025 but completed installation in early 2026 miss the 25D deadline entirely.

The credit applied to systems that met ENERGY STAR efficiency requirements or international standards for ground-source heat pumps. But installation alone didn't guarantee qualification—the IRS required systems to derive at least 50% of heating or cooling energy from geothermal sources. Or put another way, hybrid systems combining geothermal with natural gas didn't qualify unless geothermal provided the majority share.

"The credit covers geothermal heat pumps, which use the earth's constant temperature to heat and cool homes efficiently year-round." — U.S. Department of Energy

How Much Money Could You Have Claimed Under the 25D Geothermal Tax Credit?

The 25D credit covered 30% of total installation costs with no maximum dollar limit between 2022-2025. A typical residential geothermal system costing $25,000 generated a $7,500 tax credit, while larger installations reaching $50,000 produced $15,000 in savings. And projects completed in 2021 qualified for only 26%, dropping to 22% in 2020.

So a homeowner who installed a $30,000 geothermal system in December 2025 claimed $9,000 on their 2025 tax return filed in spring 2026. But the same installation in January 2026 falls under the replacement IRA framework, which maintains 30% coverage but introduces modified eligibility rules for equipment efficiency standards.

The credit covered all costs directly tied to the geothermal installation: drilling or trenching for ground loops, heat pump units, distribution systems, controls, and professional installation labor. Or if homeowners added insulation or ductwork improvements as part of the geothermal project, those costs qualified only if the contractor itemized them as necessary components of the geothermal system itself.

And homeowners with insufficient tax liability in the installation year carried forward unused 25D credit amounts to future tax years indefinitely. So a retiree owing $4,000 in federal taxes but earning a $9,000 credit applied $4,000 immediately and carried $5,000 forward to 2026, 2027, or beyond until exhausted.

What Was the Application Process for the 25D Geothermal Tax Credit?

Homeowners claimed the 25D credit by completing IRS Form 5695 (Residential Energy Credits) and attaching it to Form 1040 when filing annual federal tax returns. The process required no pre-approval, application, or IRS review before installation—taxpayers self-certified eligibility and claimed the credit based on manufacturer certifications and contractor invoices showing total project costs.

And the form required three data points: total geothermal system cost, calculation of 30% credit amount, and transfer of that figure to Schedule 3 (Additional Credits and Payments) attached to Form 1040. Or in tax software like TurboTax or H&R Block, users answered questions about home energy improvements and the software auto-populated Form 5695 with calculated credit amounts.

So homeowners kept manufacturer certifications proving ENERGY STAR compliance and itemized invoices showing equipment and labor costs in case of IRS audit, but didn't submit documentation with the initial return. The IRS spot-checked claims and requested proof only when flagging returns for examination—typically less than 1% of residential energy credit claims faced audit.

But the 25D credit differed from rebate programs requiring pre-approval and verification inspections. Homeowners hired contractors, paid full installation costs upfront, then recovered 30% through reduced tax liability when filing returns 3 to 15 months later. And this meant financing the full $20,000-$50,000 project cost before seeing any incentive dollars.

Is the 25D Geothermal Tax Credit Refundable or Non-Refundable?

The 25D credit operated as a non-refundable credit, reducing federal income tax liability to zero but generating no cash refund for amounts exceeding tax owed. A homeowner owing $8,000 in 2025 taxes with a $12,000 geothermal credit paid zero taxes and carried forward the unused $4,000 to 2026 or later years indefinitely.

And this non-refundable structure created challenges for retirees, low-income households, or taxpayers with minimal federal tax obligations. So a single filer earning $45,000 with $3,500 in federal tax liability installing a $20,000 geothermal system earned a $6,000 credit but applied only $3,500 in year one, carrying $2,500 forward to future years when sufficient tax liability existed.

But the credit offset all federal income taxes including alternative minimum tax (AMT), making it more valuable than some energy credits that phase out under AMT calculations. Or homeowners subject to AMT in high-cost states like California still claimed the full 30% geothermal credit against their total tax liability.

The carry-forward provision meant households could spread credit benefits across multiple years without expiration. And taxpayers who expected higher income and tax liability in future years strategically timed geothermal installations to maximize credit value against peak earning years.

Who Was Eligible for the 25D Geothermal Tax Credit Before It Expired?

Any U.S. taxpayer who owned a primary or secondary residence and installed a qualifying geothermal heat pump between January 1, 2006 and December 31, 2025 met basic 25D eligibility requirements. And the credit applied to existing homes, new construction, and second homes including vacation properties, but excluded rental properties unless the owner also occupied the residence part-time.

So homeowners, condominium owners, cooperative housing residents, manufactured home owners, and houseboat owners all qualified if they installed geothermal systems serving their dwelling unit. But landlords who owned rental properties without personal use didn't qualify—the IRS required the taxpayer claiming the credit to use the residence personally, not lease it entirely to tenants.

And income limits didn't apply to the 25D credit through 2025. Or a household earning $50,000 and a household earning $500,000 both claimed the full 30% credit based on installation costs. But the non-refundable structure meant higher-income taxpayers with larger tax liabilities captured more immediate value.

Married couples filing jointly, single filers, and heads of household all qualified equally. And taxpayers who installed systems on multiple residences claimed separate credits for each property in the same tax year—a homeowner adding geothermal to both a primary residence in California and a vacation cabin in Colorado claimed 30% on both projects.

The IRS required homeowners to own the geothermal system outright, not lease it from a third-party provider. So power purchase agreements (PPAs) or equipment leases didn't qualify because the homeowner didn't incur direct purchase costs eligible for the credit.

How Does the Expired 25D Credit Compare to Current Geothermal Incentives and Programs?

The 2026 replacement framework under IRA Section 25C(d)(1) maintains the same 30% federal tax credit rate through 2032, then reduces to 26% in 2033 and 22% in 2034 before scheduled expiration. And the new credit preserves most 25D benefits including unlimited dollar caps, coverage of installation labor, and indefinite carry-forward of unused amounts.

But the 2026 rules introduce stricter efficiency standards requiring geothermal heat pumps to meet updated ENERGY STAR Version 7.0 specifications or AHRI/ISO/ASHRAE 13256-1 standards with minimum coefficients of performance (COP) of 3.3 for heating and 4.1 for cooling. Or systems that qualified under 25D in 2025 may not meet 2026 requirements without equipment upgrades.

And state-level incentives stack with federal credits to increase total savings. California's Tech Clean California program offers up to $6,000 in heat pump rebates for income-qualified households installing geothermal systems in 2026. So a $28,000 installation generates $8,400 in federal credit plus $6,000 in state rebates for total incentives of $14,400—effectively cutting net costs to $13,600.

Or utility companies like Pacific Gas & Electric (PG&E) and Southern California Edison provide additional geothermal rebates ranging from $1,500 to $4,000 based on system efficiency and customer electric rates. And these utility incentives combine with federal and state programs, though some utilities reduce rebate amounts dollar-for-dollar when federal tax credits apply.

So a 2026 geothermal installation qualifies for three incentive layers: 30% federal tax credit, up to $6,000 in state rebates, and $1,500-$4,000 in utility rebates. But homeowners must verify current program availability since state and utility incentives change annually and often operate on first-come, first-served funding that depletes mid-year. Use our free rebate calculator to find your exact 2026 savings based on location and system size.

The Database of State Incentives for Renewables & Efficiency (DSIRE) tracks current geothermal incentives by state with updated program details, eligibility rules, and funding status for 2026.

Official Sources

• IRS Energy Efficient Home Improvement Credit — Federal tax credit rules, forms, and eligibility requirements for residential energy improvements
• DOE Geothermal Heat Pumps — Technical specifications, efficiency standards, and federal guidance on geothermal system installation
• DSIRE Renewable Energy Database — State-by-state incentive tracking for geothermal, solar, and energy efficiency programs

Related Reading: Learn more about What Home Improvements Are Tax Deductible.

Frequently Asked Questions

Did the 25D tax credit for geothermal systems expire?

Yes, the Section 25D Residential Clean Energy Credit expired on December 31, 2025 after covering geothermal heat pump installations since 2006. The Inflation Reduction Act replaced it with a new 30% credit under Section 25C(d)(1) effective January 1, 2026, maintaining the same percentage rate but introducing updated equipment efficiency requirements. Installations completed before December 31, 2025 still qualify for the 25D credit when filing 2025 tax returns in 2026.

What was the maximum 25D tax credit amount for geothermal?

The 25D credit had no dollar maximum—it covered 30% of total installation costs regardless of project size between 2022-2025. A $25,000 geothermal system generated a $7,500 credit, while a $50,000 installation produced $15,000 in tax savings. And the credit covered all equipment, labor, site preparation, and ground loop costs directly tied to the geothermal system installation.

Can I still claim the 25D credit if I installed geothermal before December 31 2025?

Yes, homeowners who completed geothermal installations before December 31, 2025 claim the 25D credit on their 2025 federal tax return filed in 2026 using IRS Form 5695. The installation date determines eligibility—not the tax filing date. So a system installed in November 2025 qualifies for 25D even when the homeowner files taxes in April 2026, but a January 2026 installation falls under the replacement IRA credit framework.

What replaced the 25D tax credit for geothermal systems?

The Inflation Reduction Act's Section 25C(d)(1) Energy Efficient Home Improvement Credit replaced 25D starting January 1, 2026. The new credit maintains 30% coverage through 2032, then phases down to 26% in 2033 and 22% in 2034. But it requires updated ENERGY STAR Version 7.0 specifications or higher minimum efficiency standards than 25D required, potentially excluding older equipment models that qualified under the previous framework.

Is there a difference between the 25C and 25D tax credits for geothermal?

Yes—the old 25C covered non-geothermal efficiency improvements like insulation and windows with annual dollar caps, while 25D covered renewable energy systems including geothermal with unlimited credit amounts. Both expired December 31, 2025. The 2026 replacement consolidated both into a single Section 25C framework with subsection (d)(1) covering geothermal at 30% unlimited and subsection (a) covering efficiency items with $1,200 annual caps.

Ready to calculate your 2026 geothermal savings with current federal, state, and utility incentives? Visit our rebate calculator to find your exact eligible programs and total potential savings based on your California location and system specifications. And explore other energy tax credits and heat pump rebates available in 2026 to maximize your home efficiency investment. For detailed geothermal program updates and IRA credit changes, see our complete geothermal tax credit guide.

Updated on April 14, 2026. Fact-checked by DuloCore Editors. About our research team.