Can I Claim My Hot Water Heater on My Taxes?

You may have considered upgrading your home’s water heater to a more energy-efficient model, but you’re wondering if the water heater cost is justified. It may help to know that the IRS offers an incentive for certain types of water heaters in the form of federal tax credits. Be aware, however, that after 2016, some formerly qualifying tax credits were phased out.

In a word, many. Formerly, a purchaser had only to look for the EnergyStar logo to find qualifying water heaters. This logo represented the Department of Energy's stamp of approval that a water heater met certain energy-efficiency requirements. The Environmental Protection Agency confirmed the eligibility of these products after reviewing the independent certification required of each water heater.

In 2009, Congress enacted certain energy-efficiency tax credits as part of its "Stimulus Bill," formally called the "American Recovery and Reinvestment Act of 2009." The bill had an expiration date of December 31, 2016. Therefore, if you purchased and installed a qualifying energy-efficient water heater in 2016, you could claim a water heater tax credit for it on your 2016 tax return. Some credits were substantial, in the neighborhood of $500, and qualifying water heaters included a variety of types and models.

Beginning in January 2017, all bets were off concerning a wider range of qualifying water heaters because of the expiration of the Stimulus Bill in 2016. What emerged as the sole candidate for water-heater tax credits was the solar water heater. This tax credit expires December 31, 2021, so homeowners still have a window of time to take advantage of this savings. But there is no tankless heater tax credit.

For the tax years 2017 through 2019, you can claim 30 percent of the cost of your solar water heater system, which includes the cost of installation. For the tax year 2020, the credit drops to 26 percent, and for the tax year 2021, the credit drops to 22 percent.

Taxpayers can still look for the EnergyStar logo to find a qualifying solar water heater. These water heaters as well as other types of solar systems must meet these requirements:

• The solar water heating system must be installed in a home that is owned and used as a residence by the taxpayer. Rental homes do not qualify, but second homes do.
  
• Qualifying residences must be existing homes or new construction.
• The solar water heater must generate at least half its energy from the sun.
• If homeowners have supplemental, non-solar water-heating systems, they can claim only the cost of the solar water heater.
• The hot water produced by the solar water heater must be used inside the dwelling; swimming pools and hot tubs do not qualify.
• The solar water heating system must be certified by the Solar Rating and Certification Corporation (SRCC).

Download Form 5695 (Residential Energy Credit) from IRS.gov. Complete this form and attach it to your Form 1040 (U.S. Individual Income Tax Return) or Form 1040NR (U.S. Nonresident Alien Income Tax Return).