Tankless Water Heater Tax Credit 2026: How to Claim Your Rebates

If you installed a tankless water heater in 2025 or plan to install one in 2026, there is a meaningful amount of federal tax money available to you — and most homeowners leave it on the table simply because they don’t know it exists. The Section 25C Energy Efficient Home Improvement Tax Credit covers 30 percent of the cost of qualifying tankless water heaters, up to $600 per year. Stack that with state rebates and utility incentive programs, and a high-efficiency unit can pay for itself much faster than you’d expect.

This guide explains exactly what qualifies, how much you can get, how the stacking works with other incentives, and the specific steps to claim every dollar you’re owed.

The Federal 25C Tax Credit: What It Is and How Much You Get

The Section 25C tax credit was dramatically expanded by the Inflation Reduction Act of 2022 and applies through at least 2032. For water heaters installed in tax year 2025 (filed in 2026) and beyond, the credit works as follows:

Credit amount: 30 percent of the total project cost, including equipment and installation labor
Annual cap for water heaters: $600 per tax year
Type of credit: Nonrefundable tax credit (reduces your tax liability dollar-for-dollar, but does not generate a refund if it exceeds what you owe)
No lifetime cap on water heaters under the revised rules — you can claim $600 per year in future years if you make additional qualifying improvements

For example: if you pay $2,500 for a qualifying tankless water heater and professional installation, 30 percent of that is $750. Because the water heater cap is $600, you claim $600. If your installation cost $1,800 total, 30 percent is $540, and you claim the full $540.

What Costs Count?

Under IRS Notice 2023-59, both equipment costs and installation labor are eligible for the 25C credit on water heaters. This is an important distinction — some other 25C categories (like insulation) cover only materials, not labor. For water heaters, the total invoice amount counts toward your 30 percent calculation.

ENERGY STAR Requirements: What Qualifies

Not every tankless water heater qualifies for the tax credit. The unit must meet ENERGY STAR’s Most Efficient certification or the applicable ENERGY STAR requirements for its fuel type.

Gas Tankless Water Heaters

For natural gas or propane tankless units, the qualifying threshold is a Uniform Energy Factor (UEF) of 0.95 or higher. This is a demanding standard — standard condensing tankless heaters typically land between 0.82 and 0.95, so you need a high-end condensing unit.

Models that reliably meet the 0.95+ UEF threshold:

Rinnai RUR199iN / RUR160iN (Sensei Series) The Rinnai Sensei series achieves a UEF of 0.96 and qualifies for the 25C credit. The RUR199iN delivers up to 9.8 GPM and is well-suited for large households with simultaneous hot water demands. View the Rinnai Sensei on Amazon

Navien NPE-240A2 The Navien NPE-240A2 achieves a UEF of 0.97 and is one of the more popular high-efficiency gas tankless options on the market. It includes an internal recirculation pump and a buffer tank that reduces cold-water sandwich issues. Navien units qualify for the 25C credit. View the Navien NPE-240A2 on Amazon

Rinnai RL94eN A step down in capacity from the Sensei but still meeting the UEF 0.95 threshold, the RL94eN is appropriate for medium-sized households and is regularly cited in ENERGY STAR’s qualifying product list.

Electric Tankless Water Heaters

Electric tankless units must have a UEF of 0.95 or higher (residential units under 55 gallons). Because electric resistance units convert electricity to heat at nearly 100 percent efficiency, most quality electric tankless units meet this bar.

EcoSmart ECO 27 The EcoSmart ECO 27 is a 27 kW electric tankless unit with a UEF of approximately 0.98. It’s ENERGY STAR certified and qualifies for the 25C credit. It requires three 40-amp double-pole breakers (240V), so verify your electrical panel capacity before purchasing. View the EcoSmart ECO 27 on Amazon

EcoSmart ECO 36 For larger homes or colder climates, the ECO 36 (36 kW) provides higher capacity. At a UEF of 0.98, it also qualifies. Requires up to 150 amps of dedicated circuit capacity.

Stiebel Eltron Tempra 36 Plus The Tempra 36 Plus is widely regarded as one of the highest-quality electric tankless units available and meets ENERGY STAR requirements. Its Advanced Flow Control technology reduces flow automatically if incoming water temperature drops, ensuring consistent outlet temperature.

How to Verify Your Specific Model

Before purchasing, confirm your specific model is listed on the ENERGY STAR Certified Water Heaters list at energystar.gov/productfinder. Search by brand and model number. Print or save this page — you may need it if the IRS questions your credit.

Also ask your contractor to provide the Manufacturer’s Certification Statement for the unit. This document confirms that the product meets the 25C requirements and is your primary documentation for the credit.

How to Claim the 25C Credit

Step 1: Save All Documentation

Keep the following for your records (hold them for at least 3 years after filing):

Original purchase receipt showing the model number and total cost
Installation invoice showing labor costs
Manufacturer’s Certification Statement
ENERGY STAR listing printout for your specific model

Step 2: File IRS Form 5695

The 25C credit is claimed on IRS Form 5695 (Residential Energy Credits). For a tankless water heater:

Complete Part II of Form 5695 (Energy Efficient Home Improvement Credit)
Enter your qualifying costs on Line 22a (water heaters)
The form automatically calculates 30 percent and caps the water heater credit at $600
The resulting credit flows to Schedule 3, Line 5 of your Form 1040

If you use tax software (TurboTax, H&R Block, TaxAct), the software will walk you through Form 5695 when you report energy-efficient home improvements. Answer “yes” when asked about water heater upgrades.

Step 3: Understand the Nonrefundable Limitation

The 25C credit is nonrefundable, which means it reduces your tax liability but cannot create a refund if the credit exceeds what you owe. If you normally owe $1,200 in federal income tax and claim a $600 water heater credit, your tax liability drops to $600 — and you keep the savings. But if you owe $300 and claim $600, only $300 of the credit is usable. The remainder does not carry forward.

State Rebates: Stacking Additional Savings

State rebates and utility incentives are completely separate from the federal 25C credit — you can use both simultaneously. The key programs to check:

HOMES and HEEHR Programs (IRA-Funded State Programs)

The Inflation Reduction Act created two rebate programs administered at the state level:

HOMES Rebate Program: Up to $2,000 for whole-home energy improvements that achieve at least 20 percent energy savings. Tankless water heaters may count toward your total improvement package.

HEEHR (High-Efficiency Electric Home Rebate Act): Up to $1,750 for a qualifying heat pump water heater. Electric resistance tankless units may qualify depending on your state’s program rules. Check your state energy office for current status — program rollout has varied by state.

State Tax Credits

Several states have their own energy tax credits that stack with the federal 25C:

California: No dedicated water heater state tax credit, but the California Energy Commission offers rebates through utilities.
New York: NY State offers the NY-Sun and EmPower+ programs; check NYSERDA.ny.gov for current water heater incentives.
Massachusetts: Mass Save program offers significant rebates on high-efficiency water heaters — currently up to $400 for qualifying condensing gas tankless units.
Oregon: Oregon’s Residential Energy Tax Credit (RETC) has historically offered credits for high-efficiency water heaters.

Utility Rebates

Your local gas or electric utility may offer rebates independent of state programs. These are often the fastest incentives to collect:

Visit your utility’s website and search for “rebates” or “energy efficiency programs”
Common rebate amounts: $50 to $300 for qualifying gas tankless, $50 to $200 for qualifying electric tankless
Most utility rebates require the contractor to submit paperwork at time of installation, so coordinate with your plumber before the job starts

Real-World Example: Total Savings Calculation

Here’s how the incentives can stack for a homeowner in Massachusetts who installs a Navien NPE-240A2:

Item	Amount
Equipment cost	$1,400
Professional installation	$800
Total project cost	$2,200
Federal 25C credit (30%, capped at $600)	-$600
Mass Save utility rebate	-$400
Net out-of-pocket cost	$1,200

That’s a $2,200 system for $1,200 net — a 45 percent reduction before accounting for the ongoing energy savings from replacing a 20-year-old tank water heater.

Frequently Asked Questions

Can I claim the credit on a rental property? No. The 25C credit applies only to your principal residence. Investment properties and rental homes do not qualify.

Can I claim the credit if I installed the unit myself? Yes, but only the equipment cost counts if you cannot document separate labor charges. A self-installed unit is still eligible for the credit on the equipment purchase price.

What if I missed the credit in a prior year? File an amended return (Form 1040-X) for the year the installation was completed. You generally have three years from the original filing deadline to amend.

Does the credit apply to water heater repair or parts? No. The credit applies only to the purchase of a new qualifying water heater. Repair parts and service calls do not qualify.

Can I claim $600 for a water heater and also $600 for a heat pump in the same year? Yes. The $600 cap applies per category. The 25C credit has separate caps for different improvement types (windows, doors, heat pumps, water heaters, etc.), and the total annual 25C limit is $3,200 across all categories combined.

Bottom Line

The federal 25C tax credit for tankless water heaters is one of the most straightforward energy tax credits available — no lottery, no income limit, no first-come-first-served waitlist. If you buy an ENERGY STAR-qualifying unit and file Form 5695, you get 30 percent back (up to $600) automatically.

Stack the federal credit with your state’s rebate and your utility’s program, and you can realistically recover $700 to $1,200 on a qualifying installation. The energy savings on top of that — typically $100 to $400 per year compared to a standard tank heater — make high-efficiency tankless units one of the best value propositions in home improvement right now.

Get your contractor to confirm the model qualifies before they order the unit, save every receipt, and file Form 5695 when you do your taxes. That’s all there is to it.