Upgrading your water heater can not only enhance your home's energy efficiency, but it could also lead to significant savings on your tax bill! If you’re planning to replace or install a new water heater, you may qualify for a federal tax credit designed to encourage energy-efficient home improvements. Let’s break down the key details, including how to claim the credit, what types of water heaters are eligible, and how much you could save.
What Is the Federal Tax Credit for Water Heaters?
The federal government offers incentives to homeowners who improve their home's energy efficiency, including upgrading to energy-efficient water heaters. Under the Energy Efficient Home Improvement Credit—extended as part of the Inflation Reduction Act of 2022—you can get a tax credit for qualified water heaters purchased and installed in 2023 and 2024.
This tax credit can cover up to 30% of the cost of the equipment and installation, with a maximum credit of $600 per unit for qualifying water heaters.
What Types of Water Heaters Qualify?
Not all water heaters are eligible for the tax credit. To qualify, the water heater must meet certain energy-efficiency criteria set by the government. Below are the types of water heaters that are currently eligible:
Heat pump water heaters (Hybrid water heaters):
Heat pump water heater systems use electricity to move heat from one place to another, making them highly energy-efficient. Heat pump water heaters that meet Energy Star® standards are eligible for the tax credit.
Gas water heaters
Some high-efficiency models that meet specific energy performance requirements may qualify. Look for units with an efficiency rating of at least 95%.
How to Claim the Tax Credit
Here’s how to claim the tax credit for your new water heater:
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Step 1: Check Eligibility: Ensure the water heater you’re purchasing meets the efficiency requirements. Look for the Energy Star® label or check with your installer or retailer for confirmation.
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Step 2: Keep Records: Save all receipts and manufacturer certifications. You’ll need documentation of the water heater purchase, as well as proof that it meets federal efficiency standards.
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Step 3: Fill Out IRS Form 5695: When filing your taxes, use IRS Form 5695, Residential Energy Credits. You’ll report the cost of the water heater and any associated installation fees.
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Step 4: Apply Credit to Your Tax Return: The credit will reduce the amount of taxes you owe. Keep in mind this is a non-refundable credit, meaning it can reduce your tax bill to $0, but won’t result in a refund if the credit exceeds your tax liability.
Additional State and Local Incentives
In addition to federal tax credits, you might be eligible for state or local incentives. Many utility companies and state energy programs offer rebates for upgrading to energy-efficient water heaters. Be sure to check with your local government or utility provider to maximize your savings.
Why Upgrade Your Water Heater?
Upgrading to a more efficient water heater not only qualifies you for tax credits, but it also saves money in the long run. Energy-efficient models can reduce your utility bills by consuming less energy, and they often have longer lifespans than traditional water heaters. Plus, they’re better for the environment by lowering greenhouse gas emissions.
Important Deadlines
The current federal tax credit for energy-efficient water heaters is available through December 31, 2032, but if you’re looking to take advantage of the credit on your 2024 taxes, be sure to purchase and install your water heater by the end of the year.
Conclusion
Taking advantage of the federal tax credit for a new water heater can make a big difference in your energy bills and tax returns. Whether you choose a heat pump, gas, or solar model, investing in energy efficiency not only boosts your home’s comfort but also helps protect the environment. If you’re considering a new water heater and want to know more about installation and rebates, contact ECI Comfort. We're here to help you find the right system for your home and maximize your savings!
If you live in the Delaware Valley/Greater Philadelphia area and would like to find comfort within your home, visit our website or give us a call at 215 - 245 - 3200 to learn more.
