30% Federal Tax Credit for Heat Pump Water Heaters [2023]

Is Your Heat Pump Water Heater Eligible for a Federal Tax Credit?

Did you buy a new water heater for your home? You might qualify for a tax credit. On January 1, 2023, new federal tax credits came into effect under the Inflation Reduction Act. These tax credits cover a wide range of home energy efficiency improvements, including heat pump water heaters, natural gas water heaters, and other equipment and upgrades like air conditioners, windows, doors, home energy audits, and more. You can claim tax credits on qualifying expenses for equipment installed between January 1, 2023 and December 31, 2032.

Looking for information about the tax credits for water heaters installed in 2022 or earlier?

Federal Tax Credit Overview

Annual Limits: 30% of the project cost up to a $3,200 annual maximum for all energy efficiency improvements claimed under this credit, subject to aggregate limits. The qualifying equipment and is divided into two groups, each with its own annual limit:

• Up to $2,000 annual limit toward the purchase of any combination of heat pump water heaters, air source heat pumps, and biomass stoves/boilers.
• Up to $1,200 annual limit toward the purchase of any combination of natural gas water heaters, central air conditioners, furnaces, boilers, plus other home envelope improvements (e.g. windows/doors/skylights, insulation, electrical).
• There are per-project limitations as well. Below, we’ll talk about the tax credits available for heat pump water heaters and natural gas water heaters. For further details about tax credits for other types of energy efficient home improvements, visit energystar.gov.

Dates: Equipment must be purchased and installed January 1, 2023–December 31, 2032.

Property Requirements: Equipment must be installed in an existing home and your principal residence (the place you occupy most of the time). New construction and rentals do not apply. here are also certain restrictions if you use your home for business. Your principal residence must be in the United States and may be a house, houseboat, mobile home, cooperative apartment, condominium, or a manufactured home to qualify.

Pro Tip: To make the most of the tax credits, spread your energy efficiency improvements over a few years. The $3,200 annual limit and any aggregate limits reset each year through 2032. You can find ways to mix and match the tax credits for maximum savings by looking at your options on the ENERGY STAR website. 

PLEASE NOTE: These credits are nonrefundable. You can’t receive more than you owe in taxes, and you can’t apply any excess credit to future tax years. Also, you may need to subtract certain rebates, public utility subsidies, or other financial incentives when declaring your qualifying expenses. Consult with your accountant or another tax professional to ensure that you meet all the requirements necessary to receive tax credits for your water heater upgrade. Additionally, you can ask Ray’s Complete Plumbing (or your local plumbing contractor) for details about your equipment to verify its eligibility.

Water Heater Tax Credit Details. 

Heat Pump Water Heaters:

• You can claim 30% of the project cost, up to a $2,000 maximum credit.
• Heat pump water heaters that have earned the ENERGY STAR are eligible for this credit. You can find a list of ENERGY STAR certified models here.

Natural Gas Water Heaters

• You can claim 30% of the project cost, up to a $600 maximum credit.
• The water heater must meet the following efficiency requirements:
  • Gas Storage: ENERGY STAR certified models are eligible as follows: > 0.81 UEF for tanks less than 55 gallons and > 0.86 UEF for tanks greater than or equal to 55 gallons.
  • Tankless Gas: ENERGY STAR models with > 0.95 UEF are eligible.

How Do I Apply?

To claim energy efficiency home improvement tax credits, fill out and file IRS form 5695, Residential Energy Credits with your tax return.

Tax credits are administered by the IRS, and the credit amounts you may receive are subject to IRS regulations. Therefore, we highly recommend consulting a tax professional for advice on tax preparation and your tax credit eligibility. For more information about the tax credit, you can also visit IRS.gov.

What Other Equipment Qualifies for a Tax Credit?

Even if you don’t plan on upgrading your water heater, you might intend to purchase another qualifying household appliance like a new central air conditioner or heat pump. You can see the entire list of qualifying home improvements here. There are also separate tax credits available for renewable energy home improvements, like wind, solar, and geothermal. These upgrades do not count toward the $3,200 annual maximum under the energy efficiency tax credits.

There are also separate tax credits available for home builders and commercial buildings.

Call Ray’s Complete Plumbing today for a free quote on a new heat pump water heater: (941) 205-2133

DISLCAIMER: The tax credit information contained within this website is provided for informational purposes only and is not intended to substitute for expert advice from a professional tax/financial planner or the Internal Revenue Service (IRS). The information is subject to change, and Ray’s Complete Plumbing does not guarantee the accuracy of the information provided. For the most updated information on the federal tax credits, visit energystar.gov or IRS.gov.

*NOTE FROM ENERGY STAR: Under the tax code, eligible equipment must “meet or exceed the highest efficiency tier (not including any advanced tier) established by the Consortium for Energy Efficiency which is in effect as of the beginning of the calendar year. The eligibility requirements are subject to change based on the final CEE Criteria and the Internal Revenue Service (IRS).”