The Feds will decrease your tax bill for reducing your energy use

Ya’ll have heard me talk about all kinds of financial incentives for upgrading to a heat pump water heater for a long time now.

We will even fill out all the rebate paperwork for you if you have us install your new heat pump water heater.

But there’s one big incentive that we can’t do for you: a federal tax credit.

So how can you get a federal income tax credit for buying a heat pump water heater?

We’re going to give you a basic overview here, but we are NOT tax professionals. We are plumbing and water heater experts.

If you have specific questions or concerns about income tax credits for upgrading to energy efficient appliances, please contact an accountant or tax professional.

What is a federal income tax credit? And is there one for getting a heat pump water heater?

A federal income tax credit is an amount of money a taxpayer can subtract from the amount of income tax owed to the Internal Revenue Service (IRS).

In the Inflation Reduction Act, Congress created a tax credit for installing a heat pump water heater in your home.

The maximum amount of the tax credit for purchasing and installing a heat pump water heater is $2,000. It is formally called the Energy Efficient Home Improvement Credit. 

This tax credit is available for home improvements (upgrading to a heat pump water heater) made between January 1, 2023 and December 31, 2032.

How can I qualify for a heat pump water heater tax credit?

The general requirements to claim the Energy Efficient Home Improvement Credit are:

  • Purchase AND install a heat pump water heater during the year for which you are filing taxes. You can’t just buy a heat pump water heater. It has to be installed to claim the tax credit.
  • The heat pump water heater must be installed in your primary residence.
  • The heat pump water heater must be replacing an existing water heater. The credit is not available for new homes.
  • Must meet or exceed the highest efficiency tier set by the Consortium for Energy Efficiency for the year the water heater is installed. For a list of products that meet this requirement, click here. Feel free to call Barnett Plumbing at  (925) 315-8063 with questions about potential heat pump water heater upgrades.

How much is the federal income tax credit for heat pump water heaters?

This should be an easy answer, but we’re dealing with the federal government, so it’s not.

The maximum allowable federal tax credit for upgrading to a heat pump water heater is $2,000. 

The way you figure out how much you can claim on your taxes is:

30 percent of the total purchase and installation cost, which includes labor.

So, if the total cost of your heat pump water heater is $4,000, you would claim a $1,200 tax credit.

If the total cost of your heat pump water heater upgrade is $8,000, you would claim $2,000 because that is the maximum amount of the tax credit.

The Energy Efficient Home Improvement Credit can only be used to decrease the amount of taxes you owe. If the tax credit exceeds the amount of taxes you owe, you will not receive a tax refund.

The tricky part: How rebates and incentives affect the tax credit amount. 

This is the part where you might need a federal tax expert.

As we’ve mentioned (link to Barnett’s rebate blogs here), there are multiple rebates and incentives available to help reduce the cost of a heat pump water heater.

If you receive one of the available rebates or tax incentives, it will likely change the amount you can claim toward a federal income tax credit.

  • Public utility incentive: Any funds from a public utility, like Pacific Gas and Electric, that are used to upgrade to a heat pump water heater cannot be used toward the tax credit.
  • Retail or manufacturer rebates: Anything that the IRS defines as a rebate cannot be used toward the tax credit. Typically the IRS-defined rebates are from manufacturers or sellers of heat pump water heaters.
  • State energy-efficiency incentives: Programs like the TECH Clean California incentive CAN be included towards the tax credit.

(These rules apply if the contractor or consumer receives the financial aid.)

For example, if the total cost for purchase, installation, parts and labor of a heat pump water heater is $5,000, and you received a manufacturer’s rebate of $1,000, your out-of-pocket cost is $4,000.

You can claim 30 percent of the $4,000 toward a tax credit, making the tax credit $1,200.

If the total cost for a heat pump water heater upgrade is $5,000 and you receive the full incentive from TECH Clean California of $3,100, your out-of-pocket cost would be $1,900.

Since TECH’S program is a state energy-efficiency incentive, you can claim the full $5,000 cost toward a tax credit, making the tax credit $1,500. (Psst – with the state incentive and federal tax credit, this example only costs $400!)

Show me the tax credit!

Please contact a tax professional for specific advice on claiming an Energy Efficiency Home Improvement Credit. This blog is a basic overview of the credit and how it works.

The Energy Efficiency Home Improvement Credit

  • 30 percent of total cost (includes purchase, installation, labor, and parts)
  • Maximum allowable credit is $2,000
  • Available for improvements made between January 2023 to December 2032.
  • Public utility assistance and manufacturer and retail rebates reduce the amount you can claim toward the tax credit.
  • State energy-efficiency incentives do NOT reduce the amount you can claim toward the tax credit.
  • File Form 5695, Residential Energy Credits, Part II, with your tax return to claim the credit.

If you have questions about upgrading to a heat pump water heater, which ones meet the requirements for a federal tax credit, or any financial incentive programs, please call us at (925) 302-5409.