A tankless water heater tax credit is available under Section 25C of the Internal Revenue Code, but only for units placed in service on or before December 31, 2025. A qualifying natural gas, propane, or oil tankless heater earns 30% of the total cost (unit plus installation labor) up to a $600 annual cap. The One Big Beautiful Bill Act, signed July 4, 2025, repealed the credit for any equipment placed in service after that date, so 2026 installations get nothing at the federal level.1Internal Revenue Service. FAQs for Modification of Sections 25C, 25D, 25E, 30C, 30D, 45L, 45W, and 179D Under Public Law 119-21
The 2025 Cutoff and What “Placed in Service” Means
The Inflation Reduction Act had extended this credit through 2032, but that runway was cut off. Under current law, no federal Section 25C credit applies to a tankless water heater installed in 2026 or later.1Internal Revenue Service. FAQs for Modification of Sections 25C, 25D, 25E, 30C, 30D, 45L, 45W, and 179D Under Public Law 119-21
The date that matters is when the unit was ready for use, not when you bought it or signed a contract. A heater fully installed and operational by December 31, 2025 qualifies. The same heater turned on for the first time on January 1, 2026 does not.
How Much You Can Claim and What Counts
The credit equals 30% of the qualifying cost, capped at $600 per year for a gas, propane, or oil tankless water heater. Spend $3,000 and the arithmetic gives you $900, but the cap trims that to $600. Spend $2,000 and you get the full $600.2Office of the Law Revision Counsel. 26 USC 25C – Energy Efficient Home Improvement Credit
Eligible cost includes the price of the unit and the labor to prepare, assemble, and install it on site. If your installer had to run a new gas line or add venting for the tankless heater, that work counts too.2Office of the Law Revision Counsel. 26 USC 25C – Energy Efficient Home Improvement Credit
Two things do not count. First, your own labor if you installed the unit yourself; only labor you actually paid someone else for is eligible, though the unit itself is still in the calculation.3Internal Revenue Service. Energy Efficient Home Improvement Credit – Labor Costs Second, utility rebates and manufacturer or retailer purchase-price rebates have to be subtracted from your cost before you apply the 30%. State energy-efficiency incentives generally don’t reduce your cost unless they function as a direct price adjustment.4Internal Revenue Service. Energy Efficient Home Improvement Credit
The credit is non-refundable. It can zero out your tax bill but won’t produce a refund beyond that. If you owe $400 and your credit is $600, you save $400 and lose the extra $200. The $600 cap resets each tax year, so someone who claimed the full amount in 2023 could claim it again in 2024 and 2025 for new qualifying work.
Which Tankless Units Qualify
The unit has to be new, and it has to be the right kind. For a natural gas, propane, or oil tankless water heater, the requirements are ENERGY STAR certification and a Uniform Energy Factor (UEF) of 0.95 or higher.5ENERGY STAR. Water Heaters (Natural Gas) Tax Credit
A standard electric resistance tankless unit is not on the qualifying list. The credit covers gas, propane, and oil water heaters in one bucket and heat pump water heaters in another, and a conventional electric tankless heater falls into neither.6Internal Revenue Service. Energy Efficient Home Improvement Credit – Qualifying Expenditures and Credit Amount This trips people up, because “tankless” and “energy-efficient” feel like they ought to be enough. The IRS drew the line at fuel type and technology.
Heat pump water heaters are in a separate category with a higher $2,000 annual cap. They have to 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 Most heat pump water heaters are storage-tank designs rather than tankless, but if that’s what you installed, that’s the rule you’re under.
Who Can Claim It
The heater has to be installed in an existing home in the United States. New construction is excluded. The home also has to be one you use as a residence, which is a looser standard than “principal residence.” A second home you actually spend time in can qualify. A property used only as a rental where you never stay does not.7Internal Revenue Service. Energy Efficient Home Improvement Credit – Qualifying Residence
If you use part of your home for business, use of 20% or less doesn’t affect the credit. Above 20%, you prorate based on the personal-use portion. A home used entirely for business gets nothing.4Internal Revenue Service. Energy Efficient Home Improvement Credit
Filing the Credit
Claim the credit on IRS Form 5695, Residential Energy Credits.8Internal Revenue Service. About Form 5695, Residential Energy Credits9Internal Revenue Service. 2025 Instructions for Form 569510Internal Revenue Service. 2025 Schedule 3 (Form 1040)
Documentation to Keep
Two things need to be in your file. First, proof the unit qualifies: the Manufacturer Certification Statement confirming ENERGY STAR status and the UEF threshold, usually available from the manufacturer’s website or the ENERGY STAR product database. You don’t send it in, but you need it if the IRS asks. Second, proof of what you paid: itemized receipts and invoices that separate the unit’s price from installation labor, showing both the purchase date and the installation completion date. Keep everything for at least three years from the date you file the return claiming the credit.11Internal Revenue Service. How Long Should I Keep Records?
If You Missed the Credit on a Prior Return
Installed a qualifying tankless water heater in 2023, 2024, or 2025 and didn’t claim the credit? File Form 1040-X and include a completed Form 5695 for that tax year.12Internal Revenue Service. File an Amended Return
You generally 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 return filed on April 15, 2024 for the 2023 tax year would generally be open to amendment through April 15, 2027.13Internal Revenue Service. Instructions for Form 1040-X (Rev. December 2025) With no credit available for future installations, catching a missed prior year is where the remaining money is.