How To Use the Residential Energy Credit for Tankless Water Heaters [2024]

Homeowners are turning to tankless water heaters as an alternative to traditional models. Not only do these units provide on-demand hot water, but they also offer energy efficiency benefits that can translate into long-term savings.

Moreover, savvy homeowners can take advantage of tax incentives such as the Residential Energy Credit to further offset the initial investment.

Tank vs Tankless Water Heaters

In short:

• Tank Water Heater: Like a big, always-on snack stash. Ready to go, but can run out and costs more to keep stocked.
• Tankless Water Heater: Like an on-demand, high-tech snack machine. Efficient and endless supply, but with upfront cost and a limit on how much it can deliver at once.

Explain like I’m a teenager

Imagine you’re gearing up for a long, relaxing shower after a day of endless classes and homework. Here’s where the choice between a tank water heater and a tankless water heater comes into play, kind of like choosing between a massive, always-ready snack stash and an on-demand snack vending machine.

Tank Water Heaters:

Picture a big metal cylinder, usually tucked away in a basement or a closet, that stores a large amount of hot water (we’re talking 30 to 50 gallons, or roughly 113 to 189 liters). This tank continuously heats the water, so it’s like having a huge reserve of snacks ready for you whenever you want. The downside? Just like a snack stash can run out if you have too many friends over, your hot water can run out if you take too long in the shower or if multiple people are using hot water at the same time. And, because it’s always heating the water to keep it warm, it’s like leaving a gaming console on all day, using up energy and costing you more in bills.

Tankless Water Heaters:

Now, imagine instead you have a magic box that instantly heats water on demand as it passes through on the way to your shower or faucet. No storing large volumes of hot water, just a super-efficient system that gives you hot water when you need it, sort of like a high-tech vending machine for snacks that makes them fresh on the spot. The cool part? You virtually never run out of hot water. The catch? This magic box has its limits on how much hot water it can produce at once, so if you and your siblings are all trying to shower, run the dishwasher, and do laundry at the same time, it might struggle to keep up. Also, the upfront cost is like buying the latest smartphone – higher than you might expect.

Understanding the Residential Energy Credit

The Residential Energy Credit is a federal tax credit designed to incentivize homeowners to invest in energy-efficient improvements. By installing eligible energy-saving technologies, including certain types of water heaters, homeowners can qualify for a credit on their federal income tax return.

Tankless water heaters, also known as on-demand or instantaneous water heaters, are one type of residential water heater that are eligible for this credit due to their energy-efficient operation. Unlike traditional water heaters that constantly maintain a tank of hot water, tankless models heat water only as needed, reducing standby energy losses and resulting in lower energy consumption.

How to Take Advantage of the Credit for Tankless Water Heaters

Research Eligibility: Before purchasing a tankless water heater with the intention of claiming the Residential Clean Energy Credit, homeowners should ensure that the model they choose meets the eligibility criteria set forth by the Internal Revenue Service (IRS).

Eligible models must meet specific energy efficiency standards outlined by the ENERGY STAR program. Specifically, tankless gas water heaters must have an ENERGY STAR certification and a UEF (Uniform Energy Factor) of greater than 0.95.

Keep Documentation: Proper documentation is essential when claiming the Residential Energy Credit. Homeowners should retain receipts, manufacturer certifications, and any other relevant documentation related to the purchase and installation of the tankless water heater. This information will be necessary when filing taxes and may need to be submitted as proof of eligibility.

Claiming the Credit: When filing their federal income tax return, homeowners can claim the Residential Energy Credit using IRS Form 5695 (Residential Energy Credits). The credit amount is based on a percentage of the cost of the energy-efficient improvement, up to certain limits. It’s crucial to accurately complete the form and follow IRS guidelines to ensure compliance and maximize the credit amount.

Understand Eligibility Limits: The overall total limit for the Residential Clean Energy tax credit for each tax year is $3,200. This means that homeowners can claim up to $3,200 in tax credits for eligible home improvements done within a single year.

The Residential Clean Energy Credit presents a valuable opportunity for homeowners to offset the cost of installing energy-efficient tankless water heaters. By following the steps outlined above and consulting with tax professionals as needed, homeowners can maximize the benefits of this tax incentive while embracing sustainable living practices.

With careful planning and informed decision-making, homeowners like yourself are finding that upgrading to a tankless water heater is a wise investment for both financial and environmental reasons. Not only that, but you’ll never run out of hot water, no matter how much your household demands.