Tankless Water Heater Tax Credit: How to Claim $600 on Your 2025 Return

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The Credit Ended -- But 2025 Installs Still Qualify

The Inflation Reduction Act expanded the old Section 25C credit starting January 1, 2023: 30% of total installed cost, up to $600 per year for gas and propane tankless water heaters. That credit ran through tax years 2023, 2024, and 2025.

The One Big Beautiful Bill Act, signed July 4, 2025, terminated the credit early for any unit placed in service after December 31, 2025. No 25C credit is available for tankless water heater installations made in 2026 or later.

If your unit was installed during calendar year 2025, you are still fully entitled to the credit. The IRS taxes by the year of installation (placed-in-service date), not the year you file. A December 2025 install claimed on an October 2026 extension return is completely valid.

What the $600 Cap Actually Means

The credit equals 30% of qualifying expenses (unit + labor), capped at $600. Here is how the math works:

The $600 cap is per-item, per-year. If you also installed a qualifying heat pump or biomass stove in 2025, those have a separate $2,000 annual limit and do not reduce your $600 tankless credit.

ENERGY STAR Requirements: Does Your Unit Qualify?

Not every tankless water heater qualifies. The 25C credit requires the unit to meet or exceed the Consortium for Energy Efficiency (CEE) highest efficiency tier at the time of installation. For gas and propane tankless water heaters, the practical test is ENERGY STAR Most Efficient certification, which requires a Uniform Energy Factor (UEF) of 0.95 or higher.

How to Verify Your Unit's Qualification

1. Find the model number on the unit's data plate (usually inside the front panel or on the side).
2. Search the ENERGY STAR certified products database at energystar.gov/productfinder/product/certified-gas-water-heaters/ -- your model should appear with its UEF listed.
3. Check the manufacturer's certification statement -- Rinnai, Navien, Rheem, and Noritz all publish product-specific certification letters on their websites. This document is your IRS documentation.
4. Look up the manufacturer's QMID (Qualified Manufacturer Identification Number) -- a four-character alphanumeric code required on 2025 returns. Find it on the manufacturer's tax credit page or certification statement. This requirement was new for 2025.

Units That Generally Qualify (UEF 0.95+)

• Rinnai RX series (RX160iN, RX199iN, RXP199iN) -- UEF 0.96-0.98
• Rinnai RU series condensing models -- UEF 0.93-0.96
• Navien NPE-A2 series -- UEF 0.96
• Navien NPE-S2 series -- UEF 0.96
• Rheem RTGH series condensing -- UEF 0.93-0.96
• Noritz EZTR condensing series -- UEF 0.93-0.95

Units That Generally Do NOT Qualify

• Non-condensing models with UEF below 0.95 (most entry-level units)
• Electric tankless water heaters -- ENERGY STAR Most Efficient criteria for electric tankless require UEF of 0.93+, but many point-of-use electric units fall below this threshold. Check individually.
• Outdoor-only models where the UEF is not rated on the ENERGY STAR Most Efficient list

How to Complete IRS Form 5695

Form 5695 (Residential Energy Credits) is straightforward. You file it with your 2025 Form 1040. Here is a step-by-step walkthrough of the energy efficient home improvement credit section (Part II):

Part II -- Energy Efficient Home Improvement Credit

1. Line 17a -- Water heaters. Enter the total qualifying cost (unit + labor) paid in 2025 for your qualifying gas or propane tankless water heater. This is the figure you will multiply by 30%.
2. Line 18 -- Add lines 17a through 17c. If you had only a water heater, this equals Line 17a.
3. Line 19 -- Multiply Line 18 by 30%. This is your preliminary credit amount.
4. Line 20 -- Enter $600. This is the maximum credit for water heaters. The credit cannot exceed $600 for your tankless unit.
5. Line 21 -- Enter the smaller of Line 19 or Line 20. This is your water heater credit.
6. Line 30 -- Total energy efficient home improvement credit. Sum all qualifying credits from Part II (water heater, windows, insulation, etc.). The combined limit for non-heat-pump items is $1,200 per year.
7. Line 32 -- Qualified Manufacturer Identification Number (QMID). Enter the four-character QMID from the manufacturer's certification. Required for 2025 returns. Find it at the manufacturer's tax credit page (e.g., rinnai.us/tax-credit-center or similar).

Transfer the final credit amount from Form 5695 to Schedule 3 (Additional Credits and Payments), Line 5b. This reduces your total tax liability dollar-for-dollar.

Documentation to Keep

The IRS does not require you to submit these documents with your return, but keep them for at least three years in case of audit:

• Purchase receipt for the tankless water heater (showing model number and date)
• Contractor invoice for installation labor
• Manufacturer's product certification statement confirming the model's ENERGY STAR Most Efficient qualification
• The manufacturer's QMID (four-character code)

The $2,000 vs $600 Confusion -- Cleared Up

Many homeowners and even some tax software descriptions conflate two different credit limits. Here is the accurate breakdown for 2025 returns:

The $2,000 cap applies only to heat pumps and heat pump water heaters (not standard gas tankless). The $600 cap for gas tankless is separate from and in addition to any $2,000 heat pump credit you might also claim in the same year.

What Replaces the Credit for 2026 Installations

The 25C credit is gone for new installations. The alternatives available in 2026 are state and utility programs, not federal tax credits.

Utility Rebates

Many electric and gas utilities offer rebates for high-efficiency water heater replacements, particularly heat pump water heaters. Rebates range from $50 to $1,300 depending on your utility and state. Search the DSIRE database (dsireusa.org) by ZIP code to find programs in your area. Utility rebates are applied at point-of-purchase or submitted after installation -- they are not tax credits and do not require filing Form 5695.

State Income Tax Credits

Several states maintained their own energy efficiency credits after the federal credit ended. Notable examples include Massachusetts (MassSave rebates up to $200 for gas tankless), California (utility rebates through SoCalGas and PG&E), and Oregon (Oregon ENERGY STAR rebates). Check your state energy office or the DSIRE database for current state-level programs.

The Better Alternative: Heat Pump Water Heater

If you are buying a new water heater in 2026 and want to capture meaningful savings, the heat pump water heater remains the better financial choice. State and utility rebates for heat pump water heaters are substantially larger than for gas tankless -- often $300 to $800 -- and the heat pump route eliminates ongoing gas costs, with operating costs 2-3x lower than gas tankless in moderate climates. The hybrid vs tankless cost comparison covers the full 10-year math.

Second Homes and Rental Properties

The 25C credit rules for where the installation must occur are more flexible than most homeowners realize:

• Primary residence: Qualifies for all 25C improvements including water heaters.
• Second home (vacation home): Gas and propane tankless water heaters installed in a second home used as a residence by the taxpayer also qualify. The home does not need to be your principal residence.
• Rental properties: Renters who personally purchase and install qualifying equipment in their rented residence may claim the credit. Landlords who install equipment in a tenant-occupied rental property do not qualify -- the equipment must be used by the taxpayer claiming the credit.
• New construction: The credit does not apply to units installed in newly constructed homes. It applies only to improvements to existing homes already placed in service.

The 2026 Verdict

The 25C credit is gone for new installations, but it is not gone for 2025 filers. If you installed a condensing tankless unit last year -- a Rinnai RX199iN, Rinnai RU199iN, or any ENERGY STAR Most Efficient-certified model -- file Form 5695 with your 2025 return and take the $600. Extension filers have until October 15, 2026. It is a dollar-for-dollar reduction in your tax bill, and it takes about 10 minutes to complete the form.

For 2026 buyers, the picture shifts. Check utility and state rebates through dsireusa.org -- the numbers are smaller, but they are real. And if you are open to electric, the heat pump water heater is the more defensible long-term investment: lower operating costs, larger rebates, and a path off gas entirely. See our hybrid vs tankless cost breakdown and cold climate buyer's guide for more.

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