How to Claim the Tankless Water Heater Tax Credit
Installing an energy-efficient tankless water heater can reduce your tax bill. This guide details the process for homeowners to claim this federal credit.
Homeowners who install energy-efficient tankless water heaters may be eligible for a federal tax incentive known as the Energy Efficient Home Improvement Credit. This credit rewards taxpayers for making qualified improvements to their homes that enhance energy conservation and helps reduce the upfront cost of such upgrades.
Eligibility Requirements for the Credit
Taxpayer Eligibility
To qualify for the credit, the tankless water heater must be installed in a home that serves as your principal residence. A principal residence is the home where you live most of the time, and it must be located in the United States. The credit is not available for properties you own but do not occupy, such as rental units or second homes. The credit is available for improvements to existing homes and, in some cases, newly constructed homes.
Equipment Eligibility
The tankless water heater you install must meet certain technical standards. The equipment must be ENERGY STAR certified, which indicates it meets energy efficiency levels set by the U.S. Environmental Protection Agency. For gas-powered tankless water heaters, they must have a Uniform Energy Factor (UEF) of 0.95 or higher. Homeowners should verify that their specific model meets the requirements for the year it is placed into service.
Calculating the Credit Amount
The tax credit is 30% of the total project cost, including professional installation. The maximum credit amount depends on the type of water heater installed. For energy-efficient natural gas, propane, or oil water heaters, including tankless models, the credit is capped at $600 per year. A higher credit limit of up to $2,000 is available for electric or natural gas heat pump water heaters.
These limits are part of a broader annual cap. The overall total limit for the Energy Efficient Home Improvement Credit is $3,200 per year. This includes a $1,200 annual limit for home envelope improvements like windows and insulation, and a separate $2,000 annual limit for items like heat pumps, heat pump water heaters, and biomass stoves.
Required Documentation and Form Completion
To claim the credit, you must retain all relevant documents, including the purchase receipt that clearly shows the cost of the tankless water heater and the date it was placed in service. You will also need to obtain a Manufacturer’s Certification Statement, a signed document from the manufacturer attesting that the product qualifies for the tax credit. These statements can be found on the manufacturer’s website.
For equipment placed in service on or after January 1, 2025, you must also obtain a Product Identification Number from the manufacturer and include it on your tax return.
The credit is claimed by filing IRS Form 5695, Residential Energy Credits. On Part II of this form, you will enter the total costs for your qualifying water heater, including labor. The form will then guide you through calculating the 30% credit and applying the appropriate limit.
How to Claim the Credit
The total credit amount calculated on Form 5695 is transferred to Schedule 3 (Form 1040), Additional Credits and Payments. From there, the credit amount is carried to the appropriate line on your primary tax form, Form 1040. This process directly reduces your tax liability for the year the equipment was installed.
You must attach the completed Form 5695 to your Form 1040 when you file. This applies whether you are filing electronically through tax software or submitting a paper return by mail. The credit is nonrefundable, meaning it can reduce your tax liability to zero, but you will not receive any portion of it back as a refund.