A tankless water heater tax credit of up to $600 is available under Section 25C of the Internal Revenue Code, but only for qualifying gas, propane, or oil units placed in service on or before December 31, 2025. The One Big Beautiful Bill Act, signed July 4, 2025, repealed the Energy Efficient Home Improvement Credit for any equipment installed after that date.1Internal Revenue Service. FAQs for Modification of Sections 25C, 25D, 25E, 30C, 30D, 45L, 45W, and 179D Under Public Law 119-21 If your unit was installed during the 2023, 2024, or 2025 tax year, you can still claim the credit on your return or by amending a prior one.
The December 31, 2025 Cutoff
The Inflation Reduction Act of 2022 originally extended this credit through December 31, 2032. That timeline was cut short. Install a tankless water heater on or before December 31, 2025, and it can qualify. Install one on January 1, 2026, or later, and no federal credit applies under Section 25C.
The date that matters is when the unit was placed in service, meaning fully installed and ready to use. The purchase date on your receipt doesn’t control, and neither does the date you signed a contract with your installer. If a plumber delivered the unit in late December but finished the install in January, the credit is gone.
How Much the Credit Is Worth
The credit equals 30% of what you spent on the qualifying unit plus installation labor, capped at $600 per year for a natural gas, propane, or oil tankless water heater.2Office of the Law Revision Counsel. 26 USC 25C – Energy Efficient Home Improvement Credit A $3,000 project would mathematically yield $900 at the 30% rate, but the cap pulls that down to $600.
It’s a non-refundable credit. It can erase federal tax you owe but won’t put money in your pocket beyond that. If your tax liability for the year is $400, your credit is effectively $400; the leftover $200 isn’t paid out and doesn’t carry forward.
Which Tankless Water Heaters Qualify
Fuel type and technology determine eligibility, not the word “tankless” on the box.
A gas, propane, or oil tankless water heater qualifies if it carries ENERGY STAR certification and has a Uniform Energy Factor (UEF) of 0.95 or higher.3ENERGY STAR. Water Heaters (Natural Gas) Tax Credit This is the category where most tankless models fall, and it carries the $600 annual cap.
A heat pump water heater qualifies under a separate category with its own $2,000 annual cap, and must meet the highest efficiency tier set by the Consortium for Energy Efficiency at the start of the installation year.4Internal Revenue Service. Energy Efficient Home Improvement Credit
Standard electric tankless water heaters, the resistance-element kind, are not covered. The statute lists gas, propane, and oil water heaters in one bucket and heat pump water heaters in another, and a conventional electric tankless unit fits neither.5Internal Revenue Service. Energy Efficient Home Improvement Credit – Qualifying Expenditures and Credit Amount This surprises buyers who assumed any efficient tankless model would be eligible.
Which Homes and Costs Count
The unit has to be new, not used or refurbished, and installed in an existing home in the United States. New construction is excluded.4Internal Revenue Service. Energy Efficient Home Improvement Credit
For water heaters, the home only needs to be “used as a residence by the taxpayer.” That’s broader than the principal-residence rule attached to some other Section 25C items, so second homes can qualify, and so can a home you partly rent out as long as you also live in it.6Internal Revenue Service. Energy Efficient Home Improvement Credit – Qualifying Residence A property you own purely as a rental and never occupy does not qualify.
On the cost side, the 30% calculation includes the price of the unit and the labor you paid for on-site preparation, assembly, and installation. New gas lines or venting added specifically for the tankless heater count. If you installed the unit yourself, the value of your own time doesn’t count, though the cost of the unit still does.7Internal Revenue Service. Energy Efficient Home Improvement Credit – Labor Costs
Rebates can shrink your eligible costs. A utility rebate for buying or installing the equipment is subtracted from your qualified expenses before you apply the 30% rate, and so is a manufacturer or retailer rebate tied to the purchase price. State energy efficiency incentives generally are not subtracted unless they function as a direct purchase-price adjustment.4Internal Revenue Service. Energy Efficient Home Improvement Credit So a $500 utility rebate on a $2,500 install drops your eligible costs to $2,000; a $500 state incentive on the same job typically wouldn’t.
Documentation to Keep
You need two kinds of proof: that the unit qualifies, and what you paid.
For qualification, get the Manufacturer Certification Statement showing the model meets the ENERGY STAR criteria and UEF threshold. Manufacturers usually post these on their websites, and the ENERGY STAR product database lists qualifying models. You don’t send this with your return, but you need it if the IRS asks.
For costs, keep itemized receipts and invoices that separate the price of the unit from the installation labor. The paperwork should show both the purchase date and the installation completion date, because the completion date fixes the tax year. Hold these records for at least three years from the date you file the return claiming the credit.8Internal Revenue Service. How Long Should I Keep Records?
How to Claim It on Form 5695
The credit is reported on IRS Form 5695, Residential Energy Credits.9Internal Revenue Service. About Form 5695, Residential Energy Credits On the 2025 form, the cost of a natural gas, propane, or oil water heater, including installation labor, goes on Lines 23a through 23d. Line 23a asks for the Qualified Manufacturer Identification Number and the cost of up to two units. The form applies the 30% rate and the $600 cap for you.10Internal Revenue Service. 2025 Instructions for Form 5695
Your final credit lands on Line 32 of Form 5695 and then transfers to Schedule 3 (Form 1040), Line 5b, which flows into your main return.11Internal Revenue Service. 2025 Schedule 3 (Form 1040)
Claiming It on a Prior-Year Return
If you installed a qualifying tankless unit in 2023, 2024, or 2025 and didn’t take the credit, file Form 1040-X to amend that year’s return and attach a completed Form 5695 for the correct year.12Internal Revenue Service. File an Amended Return
You have three years from the date you filed the original return, or two years from the date you paid the tax, whichever is later. A 2023 return filed on April 15, 2024, can generally be amended through April 15, 2027.13Internal Revenue Service. Instructions for Form 1040-X (Rev. December 2025) With the credit gone for new installations, going back to recover a missed claim is the only remaining way to use it.