Tankless Water Heater Tax Credits

 A tankless water heater is much different than your typical "tank-style" water heater. As its name implies, tankless heaters heat the water while it's going through a series of pipes in the unit. These water heaters are often called on-demand heaters as the water is heated only when you need it.

Tankless water heaters are available in gas and electric varieties. The electric heater uses cold water and heats it through an electric element inside the unit as it's passing through. Gas heaters do the same thing except through a gas burner. There are distinct advantages to both electric and gas tankless heaters.

With the recent rise in energy prices, as well as increased awareness of "green energy," incentives are often available to help make your new water heater easier on the pocketbook. The incentives available can be in the form of tax credits, rebates, or both. Check with your local utility company or tax office to see what type of rebates they offer is advisable. Always be sure your tankless heater qualifies for a tax credit, as there may be restrictions on which are available. Unfortunately, a federal tax credit expired in 2011, but there still are credits for other green energy heaters, including geothermal heat pumps and solar water heaters. That said, many states offer credits for tankless heaters including Oregon and Washington. State rules on qualification will vary, but for reference, the old federal rules to qualify for tax credits are as follows:

• Heaters that are oil, propane, or natural gas must have an 8.0 energy factor or higher, which is more than 33 percent more efficient than what the federal standard is currently.
• A 2.0 energy factor is the minimum for an electric heat pump heater. This is currently double in efficiency compared to the federal standard now.

When looking at incentives available, remember that instant rebates and tax credits are not the same, so don't let that confuse you. An instant rebate is claimed immediately when you purchase the heater, but the tax credit gets claimed on your income tax forms when you file your yearly return. This will reduce the amount of income tax you have to pay, depending on how it is structured. This is far better than a reduction because the credit is taken from the tax you owe, and your taxable income won't be lowered. If you are one of those people in the 30 percent tax bracket, normally, your income tax would reduce by 30 percent of what the tax deduction is valued at. But, 100 percent of the amount is reduced on your federal income tax with the tax credit. So, you save money while helping to save the planet! Make sure to check with your local tax office if you are unsure about whether you will be eligible for federal or state rebates or credits.