Doing the dishes, taking a shower, or cleaning your clothes — you need hot water and lots of it. The government understood, and offers an energy tax credit for adding a more efficient hot water heater to your home.
Tax credit particulars:
- 10% of expenditures, up to $300, for a non-solar water heater, including installation. (You can spend a lifetime total of 10% of expenditures up to $500 for all approved energy purchases combined. If you already claimed energy tax credits up to this limit, you’re done.)
- Save receipts and labels for Uncle Sam.
- File IRS Form 5695 with your return.
There are many different kinds of hot water heaters, so the Energy Star site is a good bet for info. It’s very specific on what is and is not credit-eligible. For instance, it must have a thermal efficiency of at least 90%. But it can run on gas, oil, or propane.
Don’t rely solely on contractors who may not know the details or who promise their products will get the credit in order to make a sale.
Read on to learn if you qualify for the tax credit.
Savings, Cost, and Payback Period
The average household spends between $400 and $600 annually on water heating, according to Energy Star.
A typical home can reduce water-heating bills by about $115 a year with an energy-efficient non-solar gas tankless water heater. Other kinds of heaters may also be eligible.
The Cost of Going Tankless:
- Expect to spend about $3,300 to $6,000, including installation, for a tankless water heater that runs on either natural gas or propane.
- Costs could go higher if you don’t already have a gas line running to your old heater. Even if you do, you may need to have the line and gas meter upgraded, and possibly enhance your venting, says Mark Petrarca, spokesman for water heater manufacturer AO Smith in Milwaukee.
Payback period: You can achieve utility savings, but consider the payback period. If you’re upgrading to a gas tankless system, payback will take between eight and 10 years, estimates Marci Sanders, senior manager at D&R International, which works with the Energy Star program. A Minnesota Office of Energy Security study pegs payback period time as even longer, saying most tankless water heaters would die of old age at about 20 years before they save enough energy to justify their high cost.
With electric heat pump heaters, it’ll be about two years for a family of three.
If you have a perfectly good storage tank water heater purchased within the last decade, you can likely save from $20 to $50 on annual energy costs simply by covering your existing hot water heater with an insulating blanket and turning down the heater’s thermostat.
Advantages of Tankless Systems
- They don’t warm the water until you need it.
- They take up very little room.
- They can be mounted on a wall.
- They can last up to 20 years.
- They’re less likely to rust and leak than conventional heaters.
Compare that with conventional storage tank water heaters:
- They warm the water whether you’re using it or not.
- They last only about 10 years.
Other Types of Water Heaters
Besides gas-, propane-, or oil-fueled water heaters, your electric heat pump water heater might also qualify, depending on its efficiency rating.
Electric heat pump water heaters, the most energy efficient electric option you can buy, use pressure to heat a liquid refrigerant that in turn heats water in a storage tank. They cost more than standard electric heaters, but they can pay back the difference in price in less than two years. An Energy Star model uses up to 65% less electricity than a standard electric water heater, and can save up to $3,000 over the life of the appliance.
Solar water heaters are eligible for a tax credit under a separate program. They’re best suited for mild to hot climates because energy savings can be reduced or diminished on cold and cloudy days.
Think Smart for a New Water Heater
Is your current water heater starting to show wear and tear, like rust or small leaks? Get a new one. Most homeowners replace a water heater only after it stops working. Bad idea. When a water heater fails, there’s the potential for a big, wet mess. There’s also the inconvenience of living without hot water.
Worse, if you wait until it’s kaput, you might rush into a purchase without shopping around or weighing the benefits of newer technologies. When you’re looking to upgrade:
- Make sure the unit qualifies for the tax credits.
- Figure out how big a unit to get.
Tankless models are rated by how many gallons of hot water they produce per minute. How much hot water you use at one time will determine what makes sense for your home. Do you take long showers while running the dishwasher and washing machine? Consult a plumber, but figure 3 gallons per minute should be sufficient for most families.
With tank-based systems, the first-hour rating FHR) is more important than just gallon capacity. The FHR tells you how much hot water the unit will reliably deliver in a set amount of time. Does your family of four use 40 gallons of hot water while getting ready during the same hour in the morning? An 80-gallon water heater with an FHR of 30 gallons won’t cut it.
This article provides general information about tax laws and consequences, but isn’t intended to be relied upon as tax or legal advice applicable to particular transactions or circumstances. Consult a tax professional for such advice; tax laws may vary by jurisdiction.