How to Claim the Water Heater Federal Tax Credit
This guide clarifies the process for claiming the water heater tax credit, covering the necessary steps and documentation to lower your income tax.
A federal tax benefit, part of the broader Energy Efficient Home Improvement Credit, is offered for installing high-efficiency water heaters. This nonrefundable tax credit lowers the upfront cost of new, qualifying equipment by directly reducing a taxpayer’s total tax liability. It cannot result in a refund greater than the amount of tax owed. The credit is available for improvements made through 2032.
Qualifying for the Credit
Taxpayer and Property Rules
To be eligible, the taxpayer must install the qualifying water heater in their principal residence located in the United States. A principal residence is the home you live in most of the time, and the credit is not available for equipment installed in new homes or rental properties. The rules apply to various home types, including:
- Houses
- Mobile homes
- Cooperative apartments
- Condominiums
Equipment Standards
The water heater must be new and meet specific energy efficiency standards, which vary depending on the type of water heater installed. For instance, electric or natural gas heat pump water heaters must meet or exceed the highest efficiency tier established by the Consortium for Energy Efficiency (CEE) that is in effect when the property is placed in service. Other types of water heaters, such as natural gas, propane, or oil, must also meet specific criteria; for example, natural gas models must have a thermal efficiency rating of at least 75% to qualify.
To ensure a product qualifies, homeowners should look for the ENERGY STAR label. Starting in 2025, the equipment must be produced by a manufacturer registered with the IRS, and you must report the item’s product identification number (PIN) on your tax return to claim the credit.
Calculating the Credit Amount
The credit is calculated as 30% of the total cost of the new water heater, which includes both the price of the unit and any labor costs for its installation. The credit is subject to annual limits that reset each year, meaning you can claim the credit for different projects in subsequent years.
There is a specific maximum credit of $2,000 per year for installing a qualifying electric or natural gas heat pump water heater. For other qualifying water heaters, such as gas, propane, or oil models, the credit is capped at $600. These limits are part of a larger, overall annual cap of $3,200 for all combined Energy Efficient Home Improvement Credits.
For example, if a homeowner installs a qualifying heat pump water heater for a total cost of $4,000, the 30% calculation is $1,200. Since $1,200 is below the $2,000 maximum for this equipment, the homeowner could claim the full $1,200.
Required Documentation and Form Preparation
To claim the water heater tax credit, you must complete IRS Form 5695, Residential Energy Credits. You will need two primary documents: the itemized receipt from the seller and the Manufacturer’s Certification Statement. The receipt must show the date the water heater was placed in service and a cost breakdown, while the statement confirms the product qualifies. You should keep the manufacturer’s statement for your records but do not need to attach it to your return. With these documents, you can fill out Form 5695, entering the costs for a qualifying electric or natural gas heat pump water heater on line 29a.
How to Claim the Credit
After completing Form 5695, the total credit amount is transferred to Schedule 3 (Form 1040), Additional Credits and Payments. The credit from Schedule 3 is then carried to the main Form 1040, where it reduces your tax liability. If you use tax preparation software, the program will automatically handle these transfers. For those who file by mail, you must ensure the credit amount is correctly entered on Schedule 3 and attach the completed Form 5695 to your tax return.