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Hybrid water heaters have exploded onto the sustainable home living scene. These units use heat already in the air to produce hot water more efficiently than other types of water heaters.
However, they can benefit you in additional ways besides providing hot water.
Hybrid hot water heaters, also called heat pump water heaters, take a historically inefficient and energy-intensive mechanical process and transform it into an efficient, energy-saving option. Because of their efficiency, there are a variety of incentives for investing in a hybrid hot water heater.
As a homeowner, you may wonder if one such benefit is tax credits.
So, let’s talk more about potential hybrid water heater tax credits and what they can mean for the overall cost of a hybrid water heater.
Is There a Tax Credit or Rebate for Hybrid Water Heaters?
There are a variety of rebates, tax credits, deductions, and incentives for purchasing a hybrid hot water heater. These come from both the public and private sectors and apply to both residential and commercial properties.
There is a tax credit for those who purchase a heat pump water heater as long as they meet specific requirements. The Inflation Reduction Act of 2022 awards multiple incentives for purchasing and installing a hybrid heat pump.
Is a Heat Pump Water Heater Tax-Deductible?
While hybrid water heaters can allow you a tax credit, they are not tax-deductible because they do not affect your income in a way that would lower it. Instead, it comes as a credit to the taxes you owe. If you don’t owe any taxes, the IRS will include this refund in your return.
This distinction is important because it changes how the IRS processes the credit.
Tax deductibles reduce your overall income, meaning you report less income during tax time. This category includes deductions for sales tax, business expenses, student loans, and other payments that directly affect the amount of money you are bringing in.
Tax credits work a little differently. They come in after the fact and account for things you did during the year that didn’t affect how much you brought home but still cost you money. Some common tax credits include child or dependent taxes, health care costs, and the tax credit you will receive for your new hybrid water heater.
So, when it comes time to file your taxes, you will need to provide the IRS with information on your new hybrid heat pump water heater. This declaration will allow you to receive your tax credit, either deducting the amount you owe or triggering a refund to come your way.
Why Do Heat Pump Water Heaters Earn Incentives?
Heat pump or hybrid hot water heaters have a much higher energy efficiency than their non-heat pump counterparts. They achieve that lower carbon footprint by using the heat from the air outside to aid in heating the water. These water heaters are most effective in warmer climates where they can use the air outside to heat the water year-round.
Another major difference between a hybrid water heater and a standard water heater is it doesn’t run all the time. It is quite efficient at heating the water so, even though it has a tank, it doesn’t need to be using energy constantly to keep the water warm.
Because of these factors, hybrid water heaters can consume significantly less energy and therefore reduce energy costs. Over the course of its life, typically at least ten years, a hybrid heat pump can save a household $3,500.
Heat pump hot water heaters also have a longer lifespan than conventional water heaters. A hybrid water heater has an average life of 13-15 years, whereas a conventional water heater has an average life of 9-12 years.
What Tax Credits, Deductions, Incentives, and Rebates Exist for Hybrid Water Heaters?
There are a variety of great incentives that exist for installing a hybrid water heater. In fact, utilizing the list of perks below can significantly reduce the cost of buying a water heater.
Typically, a hybrid water heater can cost 2 to 3 times as much as a conventional electric water heater, which can be a big upfront cost for a lot of people. However, the rebates, tax credits, and incentives can bring the cost down to a more manageable amount.
Before the updated Inflation Reduction Act, taxpayers were only eligible for a $300 tax credit for installing a new hybrid water heater that met all the requirements. Since the update, starting in 2023, homeowners can receive up to $1,200 for a new hybrid water heater that meets all requirements.
This tax credit will cover a good portion of any new hybrid water heater, but other rebates are still available for you to consider. Refunds for your new water heater rely on your state and the company you purchase it from; if you want a clear breakdown of each company and the rebate you can receive from your state, continue reading—we’ll cover this information later in the article.
It’s worth taking the time to investigate which company offers you the best deal on a new hybrid heat pump water heater, as they vary so much. Avoid purchasing a water heater without doing your own research, as not every hybrid water heater will qualify for the tax credit.
You can also save in other ways by purchasing a hybrid water heater. While the credits and rebates above cover the money you get back, switching to a hybrid water heater can save you money in other ways too.
Check out our article about all the savings you can expect with a hybrid water heater if you want more information.
What Are the Requirements You Need To Meet To Receive the Tax Credit?
There are specific requirements that your hybrid water heater needs to meet to qualify for the federal tax credit.
Before we get into these requirements, consider that this process is much more straightforward when working with major companies, as they will provide you with a notice that the product qualifies you for the tax credit before you even buy it.
That said, let’s go over the conditions under which you can qualify for the tax credit.
The Water Heater Must Be Installed in Your Primary Residence
This requirement may seem odd, but the government is looking for people to use hybrid water heaters regularly as an alternative, so they require that you install them in your principal residence.
Installing a hybrid heat pump water heater in a vacation house won’t make you eligible for the tax credit.
Your Annual Income Must Fall Below a Specific Amount
There are also income requirements to receive a tax credit. For example, the Act helps low to medium-income families with the expense of a new hybrid water heater that may be outside their price range without the credit. To qualify for the credit, you must have a total annual income of less than 150% of the median income where you live.
Let’s break down what that means for you.
First, you will need to know the median income of where you live (or where you plan to install the heater).
Once you have the median income, you need to calculate 150% of that number, which you can do by multiplying the median income figure by 1.5. Your income must be lower than that number to qualify.
For example, the median household income in 2020 for St Louis, Missouri, was $45,782, according to the Census Bureau. Therefore, to meet the income requirement to receive this tax credit, you would need a household income of less than $68,673.
These numbers will vary based on your location and how you file your taxes at the end of the year. In addition, be aware that these requirements may change periodically if your living situation changes.
For example, you will file differently if you are a single or multiple-income home, and the requirements will change.
So, if you want the tax credit, try calculating this before making your purchase because you may not be eligible otherwise. Keep in mind that there is no minimum amount you must make to receive this credit.
The Manufacturer Must Provide a Certification Statement
You will need proof from the manufacturer that the heat pump you purchased and installed fits its criteria. When you purchase an eligible hybrid water heater, it will come with a certification statement from the manufacturer that you can provide with your taxes when filing.
If you did not receive this when purchasing your new pump, contact the manufacturer, as you need it to qualify. You will not receive the credit if the manufacturer can’t or refuses to provide it.
You Must Own Your Home
You will not qualify for this tax credit if you install a hybrid water heater in a new home or in a rental. You must own your home to qualify, and building your own home does not qualify you for this specific credit.
The Water Heater Must Have a Certain UEF
Finally, to qualify for this credit, the water heater you choose must have a uniform energy factor of at least 2.2. This number is how companies, states, and the government measure how truly energy efficient a water heater is.
While this should not concern you, it is worth asking the manufacturer to ensure it meets this requirement before purchasing.
How To Apply for the Credit
While the rebates you can receive are typically handled by the manufacturer when you purchase the water heater, the tax credit is a little more complicated.
First, you will need to gather the information above. You will need proof of purchase and the certification statement from the manufacturer.
When it comes time to file your taxes, you will need to include this information for the IRS to provide your rebate. This process is straightforward if you use online tax filing software to file every year.
These programs will ask you for any specific purchases you made throughout the year that could qualify you for the credit, ask for the necessary information, and get the credit for you.
Overall, using these types of programs can be a lot easier. However, if you have a professional handle your taxes every year, ensure you provide them with the information above about your purchase so they can get you that credit.
If you prefer a DIY approach to filing taxes, ensure you are careful to include all information the IRS requires. While it will still ask for any further information needed, providing all information upfront can help prevent a delay in receiving your tax credit. So, gather everything you need first and get a head start on the credit.
Rebates are a great way to earn cash back after purchasing a hybrid water heater. It is important to note that for a rebate, you must first purchase the unit, then apply for the rebate.
AO Smith offers pretty hefty rebates in conjunction with different states. Most of them have different criteria linked to the Energy Star rating of the appliance, but besides that, it depends on the unit you purchase.
The rebates range in amount from $50 to $550 depending on location and unit. You can search by unit and location to estimate the rebate you will get here. This rebate applies to both residential and commercial properties.
Rheem has a similar program to AO Smith. The rebate amount is based on location and unit purchased, and can be worth up to $600. The average rebate amount is between $300 and $400. For your area, you can search by unit and location here. This rebate applies to both residential and commercial properties.
Bradford White is another major hybrid water heater manufacturer that has hefty rebates. They have a great search feature to filter by location and rebates average about $300. They also have benefits for using a certified Bradford White installer that is also based on unit and location. This rebate applies to both residential and commercial properties.
This rebate is not company-specific but based on the UEF of a hybrid water heater unit. The rebate is worth $400 and applies to hybrid water heaters that have a UEF of 3.0 or higher. It is important to note that any of the units that this rebate applies to should also qualify for the tax credit, which only requires a minimum UEF of 2.2.
This rebate is available by state and will depend on where you live. It only applies to residential properties. The rebate amount may also change slightly depending on location. It does require that the appliance be purchased by a qualifying company or distributor.
The US Energy Information Administration offers a lot of invaluable information for each state. This includes different links to energy websites for each state. You can also simply search online for the Energy Star rebate and the name of your state.
Thanks to the updated Act, you can expect a much bigger tax credit for purchasing a hybrid heat pump water heater now and in the future. While you need to meet requirements, having this hybrid water heater can help lower your heating bill and get you a sizable credit to go along with it.
When looking into purchasing a hybrid water heater, it is critically important to do research first. In order to qualify for the federal tax credit, company rebates, and Energy Star rebates, there are certain minimum requirements.
This depends a lot on where you live and can include the date purchased, who it is purchased from, who installs it, the type of property it is installed on, and the energy efficiency of the unit.
Even though there is likely a good amount of research that will go into determining the water heater you should purchase, it will be a great addition to your home. The time spent researching could pay off in thousands of dollars in tax credits and rebates.