What Water Heaters Qualify for the Federal Tax Credit?

Through the end of 2025, three types of water heaters qualified for a federal tax credit: ENERGY STAR-certified electric heat pump water heaters, ENERGY STAR-certified natural gas, propane, or oil water heaters meeting specific efficiency thresholds, and solar water heaters certified by the Solar Rating Certification Corporation or a comparable body. The credit was worth 30% of the total project cost, capped at $2,000 for heat pump models and $600 for gas, propane, or oil models. Standard electric resistance water heaters never qualified. If your water heater was placed in service on or after January 1, 2026, no federal tax credit is available under current law.¹

Heat Pump Water Heaters

Electric heat pump water heaters offered the largest federal benefit. To qualify, a unit had to be ENERGY STAR certified, which meant meeting or exceeding the highest efficiency tier set by the Consortium for Energy Efficiency at the start of the calendar year. In practice, ENERGY STAR-certified heat pump water heaters carry a Uniform Energy Factor of 3.3 or higher.²

The credit for a qualifying heat pump water heater was 30% of the total project cost, up to $2,000 per year. That $2,000 ceiling was shared with heat pumps for space heating and biomass stoves or boilers, so combining several of those items in a single tax year did not raise the cap.

Natural Gas, Propane, and Oil Water Heaters

Gas-fired, propane, and oil-fired water heaters qualified if they were ENERGY STAR certified and met specific UEF thresholds that varied by tank size and configuration:

Storage tanks under 55 gallons: UEF of at least 0.81
Storage tanks 55 gallons or larger: UEF of at least 0.86
Tankless (instantaneous) models: UEF of at least 0.95

The credit for these units was 30% of project cost, capped at $600 per year. This cap sat inside a broader $1,200 annual aggregate that also covered windows, doors, insulation, and other non-heat-pump improvements.³

Solar Water Heaters

Solar water heaters fell under a different provision, Section 25D (the Residential Clean Energy Credit), rather than Section 25C. To qualify, at least half the energy used to heat water had to come from the sun, and the system needed performance certification from the Solar Rating Certification Corporation or a comparable government-endorsed entity.⁴

The Section 25D credit was also 30% of project costs but had no annual dollar cap on the credit amount. Like the Section 25C categories, it ended for property placed in service after December 31, 2025.⁵

What Never Qualified

Standard electric resistance water heaters were never eligible for either credit, regardless of their efficiency rating. The statute listed electric heat pump water heaters, natural gas, propane, and oil water heaters as the qualifying categories under Section 25C. A conventional electric tank running on a heating element did not fall into any of them.³

How Much the Credit Was Worth

Section 25C paid 30% of total project costs, including equipment and professional installation labor.⁶ Because the heat pump water heater cap of $2,000 sat outside the $1,200 general cap, a homeowner combining a heat pump water heater with other qualifying improvements in the same year could claim as much as $3,200 in total credits.⁷

The credit was non-refundable. It could reduce your federal tax bill to zero but would not, on its own, generate a refund. If your tax liability for the year was smaller than the credit you earned, the excess was lost. There is no carryforward to a later year.⁸

Who Could Claim It

The credit was available only for water heaters installed in an existing home located in the United States. Equipment installed in newly constructed homes did not qualify.⁹

You did not have to own the home. Renters who bought and installed a qualifying water heater could claim the credit, and second homes used as a residence were eligible too. The requirement was that you actually lived in the home. Landlords could not claim the credit for water heaters in a property they rented out but did not use as a residence themselves.

How State Rebates and Utility Incentives Affect the Credit

A rebate from a state program, utility company, or DOE Home Energy Rebate program reduces your qualified expenses before you calculate the 30% credit. You don’t report the rebate as income, but you do subtract it from the project cost.¹⁰

If you paid $2,000 for a heat pump water heater and received a $1,000 state rebate, your eligible expense for the federal credit is $1,000, and the credit is $300 rather than $600. The combined total of any federal rebate and tax credit also cannot exceed the actual cost of the project.

Documentation for a 2025 Claim

To claim the credit for a water heater installed in 2025, keep three things with your tax records.

The first is the manufacturer’s certification statement confirming that the product meets federal efficiency requirements. It must include a signed declaration under penalties of perjury that the information is accurate.¹¹ You don’t attach it to your return, but you should have it ready in case of an IRS inquiry.

The second is the Qualified Manufacturer Identification Number, or QMID. Beginning with 2025 installations, every claim for the Energy Efficient Home Improvement Credit requires a four-character alphanumeric QMID entered on Form 5695. Without a valid QMID, the credit is not allowed. The number is typically listed on the manufacturer’s certification or product documentation.¹²

The third is your purchase and installation record. Keep the contractor invoice or retail receipt showing the purchase price and the date installation was completed. The invoice should separate the water heater’s cost from labor, since the 30% credit applies to both. The UEF rating is usually on the product label, in the owner’s manual, or on the manufacturer’s website.

Filing on Form 5695

The credit is claimed on IRS Form 5695, Residential Energy Credits. Enter your total qualified costs and the QMID on the lines that correspond to your water heater type. The calculated credit transfers to Schedule 3 of Form 1040.¹³ The process is the same whether you file electronically or on paper. The credit is based on when the equipment was placed in service, not when you file, so a water heater installed and operational before January 1, 2026, still qualifies on a return filed in 2026.⁸

What Changed for 2026

Public Law 119-21, signed on July 4, 2025, repealed both Section 25C and Section 25D for property placed in service after December 31, 2025.¹ For a water heater installed in 2026 or later, no federal tax credit is currently available, regardless of the technology or efficiency rating. State and utility incentives may still apply where they exist, but the federal credit for water heaters is gone.

1
Internal Revenue Service. FAQs for Modification of Sections 25C, 25D, 25E, 30C, 30D, 45L, 45W, and 179D Under Public Law 119-21
2
ENERGY STAR. Heat Pump Water Heaters Tax Credit
3
ENERGY STAR. Water Heaters (Natural Gas) Tax Credit
4
Office of the Law Revision Counsel. 26 USC 25D – Residential Clean Energy Credit
5
Internal Revenue Service. Residential Clean Energy Credit
6
Office of the Law Revision Counsel. 26 USC 25C – Energy Efficient Home Improvement Credit
7
Internal Revenue Service. Home Energy Tax Credits
8
Internal Revenue Service. Frequently Asked Questions About Energy Efficient Home Improvements and Residential Clean Energy Property Credits – Timing of Credits
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Internal Revenue Service. Frequently Asked Questions About Energy Efficient Home Improvements and Residential Clean Energy Property Credits – Qualifying Residence
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U.S. Department of the Treasury. Coordinating DOE Home Energy Rebates with Energy-Efficient Home Improvement Tax Credits: An Explainer
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Internal Revenue Service. Energy Efficient Home Improvement Credit Qualified Manufacturer Requirements
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Internal Revenue Service. Instructions for Form 5695 (2025)
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Internal Revenue Service. Form 5695 – 2025 Residential Energy Credits