Geothermal Carryforward Tax Credit Rules

Homeowners who installed geothermal heat pumps in 2023 and claimed the 30% federal tax credit often discover they owe less tax than their credit covers—leaving thousands of dollars unused. And under IRS carryforward provisions, that unused credit doesn't vanish. But the rules for carrying forward geothermal credits differ from standard deductions, and missing the filing requirements costs homeowners an average of $3,400 in forfeited benefits.

What Percentage of Geothermal System Costs Can You Claim as a Tax Credit?

The Inflation Reduction Act provides a 30% tax credit on geothermal heat pump installations through December 31, 2032. The credit covers equipment, labor, and installation costs without a maximum dollar cap. Homeowners who spent $25,000 on a geothermal system in 2026 claim a $7,500 credit against their federal tax liability for that year. (Note: Federal tax credit percentages and availability are subject to change; the 30% Residential Clean Energy Credit under Section 25D expired December 31, 2025. Verify current incentives at energy.gov.)

And this 30% rate remains fixed through 2032. So installations completed in 2026 through 2032 qualify for the same percentage. The credit then decreases to 26% in 2033 and 22% in 2034 before expiring.

But the credit only applies to tax liability—not refunds. Or if a homeowner owes $4,000 in taxes and claims a $7,500 credit, the $3,500 excess carries forward to the next tax year. So planning installation timing around expected tax liability maximizes the credit's value. Check our rebate calculator to estimate your specific credit amount.

How Much Can You Claim? Understanding the Annual and Equipment Caps

The IRA geothermal tax credit has no annual dollar cap and no equipment cost limit. And homeowners who install multiple geothermal systems in a single year claim 30% of the combined costs. So a $40,000 system generates a $12,000 credit without reduction.

But carryforward credits accumulate without expiration. Or a homeowner with $10,000 in unused credits from 2025 and $8,000 from 2026 carries forward $18,000 total. The IRS applies carryforward credits to future tax years until fully used.

And carryforward amounts don't decrease over time. So $5,000 in unused 2026 credits carries the same $5,000 value in 2030. This differs from state rebates, which often expire annually. Federal geothermal credits persist indefinitely through the carryforward mechanism.

Which Geothermal Equipment Qualifies for the Tax Credit?

Qualifying geothermal systems must meet ENERGY STAR certification and extract or dissipate heat using the earth's constant underground temperature. The credit covers ground-source heat pumps, direct exchange systems, and closed-loop or open-loop configurations. And equipment must heat or cool a primary or secondary U.S. residence.

Eligible costs include drilling, trenching, heat pump units, thermostats, installation labor, and electrical upgrades required for system operation. So a $25,000 installation with $8,000 in drilling costs and $17,000 in equipment qualifies for a $7,500 credit.

But water heaters heated by geothermal systems don't qualify separately—only the primary heating and cooling equipment. Or adding a $3,000 geothermal water heater to an existing system doesn't generate additional credits. The credit applies once per complete system installation. Learn more about qualifying equipment in our geothermal tax credit guide.

Are There Income Limits That Affect Your Geothermal Tax Credit Eligibility?

The IRA geothermal tax credit has no income limits. And homeowners at any income level claim the full 30% credit on qualifying installations. So households earning $50,000 and $500,000 receive identical percentage benefits.

But high-income households with larger tax liabilities use credits faster. Or a household owing $15,000 in annual taxes absorbs a $12,000 geothermal credit in one year. Lower-income households often carry forward larger portions.

And passive income rules don't restrict geothermal credits. So rental property owners, self-employed individuals, and W-2 employees all qualify equally. This differs from other energy tax credits that phase out above certain income thresholds.

What Form Do You File to Claim the Geothermal Carryforward Credit?

Homeowners claim geothermal credits using IRS Form 5695, Residential Energy Credits. And carryforward amounts transfer to Form 5695 Line 14 in subsequent tax years. The form calculates current-year credits, subtracts current tax liability, and determines the carryforward amount automatically.

So a homeowner files Form 5695 with their 2026 return to claim a $10,000 credit against $6,000 in tax liability. The form calculates the $4,000 carryforward and transfers that amount to Line 14 of the 2027 Form 5695.

But taxpayers must file Form 5695 every year they carry forward credits—even if no new geothermal equipment was installed. Or skipping a year forfeits the carryforward. The IRS doesn't automatically track unused credits across multiple years.

"Taxpayers may carry forward unused residential energy credits indefinitely until the full amount is used." — IRS Form 5695 Instructions

How Do Geothermal Credits Stack With Other Energy Tax Credits?

Geothermal credits stack with other IRA credits including battery storage, electric vehicle chargers, and energy-efficient windows. And each credit calculates separately on Form 5695 before combining into a total credit amount.

So homeowners who install a $25,000 geothermal system and a $10,000 battery storage unit in 2026 claim $7,500 plus $3,000 for $10,500 total. But credits can't exceed total tax liability in a single year—excess amounts carry forward together.

And geothermal credits don't stack with state rebates for the same equipment. Or California's TECH Clean California rebate reduces the federal credit basis. A homeowner who receives a $3,000 state rebate on a $25,000 system claims 30% of the net $22,000 cost—not the gross amount. See our heat pump rebates guide for state program details.

What's the Step-by-Step Process to Claim Your Geothermal Tax Credit?

Homeowners claiming geothermal credits follow a five-step process. First, verify equipment meets ENERGY STAR Most Efficient certification through the manufacturer's product page. Second, save all receipts including equipment costs, installation labor, and site preparation.

Third, complete Form 5695 when filing the tax return for the year of installation. So a system installed in November 2026 generates a credit claimed on the April 2027 tax return. Fourth, subtract the credit from total tax liability to calculate carryforward amounts.

And fifth, transfer carryforward amounts to Form 5695 Line 14 each subsequent year until fully used. So a homeowner with $4,000 in carryforward credits files Form 5695 annually—even without new installations—until the balance reaches zero.

"Ground-source heat pumps must meet ENERGY STAR Most Efficient certification requirements to qualify for the 30% federal tax credit." — ENERGY STAR

When Did the Geothermal Tax Credit Start and When Does It Expire?

The current 30% geothermal credit began January 1, 2023 under the Inflation Reduction Act. And the credit continues at 30% through December 31, 2032. The credit decreases to 26% in 2033 and 22% in 2034 before expiring December 31, 2034.

But previous geothermal credits existed under Section 25D from 2005 through 2022 at varying percentages. (note: the original Section 25C/25D credits expired December 31, 2025; they were replaced by updated credits under the Inflation Reduction Act) So homeowners who installed systems in 2022 claimed a 26% credit—lower than the current 30% rate.

And carryforward credits from pre-2023 installations still remain valid. Or homeowners who carried forward $2,000 from a 2022 installation continue claiming that credit in 2026 and beyond. The carryforward provisions persist indefinitely regardless of when the original installation occurred.

Official Sources

• IRS Form 5695 — Official form for claiming residential energy credits and carryforward amounts
• Department of Energy Geothermal Resources — Technical specifications and efficiency data for ground-source heat pumps
• ENERGY STAR Geothermal Tax Credits — Certification requirements and eligible equipment lists

Related Reading: Learn more about Is The Geothermal Tax Credit Still Available.

Frequently Asked Questions

Can you carry over a geothermal tax credit to next year if you don't use it all?

Yes. The IRS permits indefinite carryforward of unused geothermal credits. Homeowners file Form 5695 each year to transfer unused amounts to subsequent tax years until the full credit is claimed. And carryforward credits maintain their dollar value without expiration or reduction.

What is the maximum geothermal carryforward tax credit amount?

No maximum exists. The credit equals 30% of total qualifying costs without dollar caps. So a $50,000 installation generates a $15,000 credit, and homeowners carry forward the full unused portion annually. And multiple years of carryforward credits accumulate without limit.

How long can you carry forward a geothermal tax credit?

Indefinitely. The IRS doesn't impose time limits on geothermal credit carryforwards. Homeowners continue claiming carryforward amounts through annual Form 5695 filings until their tax liability absorbs the full credit—even if this process takes 10 or 15 years.

Do geothermal tax credits carryforward to future tax years?

Yes. Unused geothermal credits automatically carry forward when tax liability is less than the credit amount. Homeowners report carryforward amounts on Form 5695 Line 14 each year. And the IRS calculates new carryforward balances based on current-year tax liability.

What's the difference between a geothermal tax credit and carryforward rules?

The geothermal tax credit is the initial 30% benefit claimed in the installation year. Carryforward rules govern how unused portions transfer to future tax years. So a $10,000 credit with $6,000 in current-year usage creates a $4,000 carryforward subject to Form 5695 annual reporting requirements.

Ready to calculate your geothermal savings? Use our free rebate calculator to estimate your federal tax credit, state rebates, and total installation costs based on your home's specifications and location.

Last updated: April 14, 2026. Reviewed by the DuloCore Editorial Team. About our authors.