If you’re shopping for a tankless water heater in 2026, here’s the headline you need before you read anything else: the federal tax credit is gone. The Energy Efficient Home Improvement Credit (Section 25C), which used to put up to $600 back in your pocket for a qualifying gas tankless unit, expired for any equipment placed in service after December 31, 2025. That’s not a rumor or a budget delay — it was repealed by the One Big Beautiful Bill Act (OBBBA), signed into law in July 2025.
That said, “no federal credit” doesn’t mean “no money on the table.” State programs, utility rebates, and a narrow window to retroactively claim the 2025 credit are all still very much alive. This guide walks through exactly what’s available, who still qualifies for what, and how to find the incentives specific to your address.
The Federal 25C Credit: What Changed and Why
The Inflation Reduction Act of 2022 expanded Section 25C and was originally scheduled to run through 2032. Under that program, homeowners could claim 30% of the cost of equipment and labor for a qualifying tankless water heater, capped at $600 per year, within a broader $1,200 annual limit for general efficiency upgrades.
That changed in mid-2025. The OBBBA eliminated Section 25C (along with the related 25D credit for solar and other renewable equipment) for any property placed in service after December 31, 2025. Industry analysts don’t expect it to return anytime soon — there’s no pending legislation or funding cycle that would reinstate it.
The practical effect: if your tankless water heater was installed and operational on or before December 31, 2025, you’re covered. If it goes in on or after January 1, 2026, the federal credit simply isn’t available, no matter how efficient the unit is.
Did You Install in 2025? You Can Still Claim It
If your installation was completed and “placed in service” by December 31, 2025, you can still file for the credit on your 2025 tax return this filing season — or amend a return from up to three years back if you missed claiming it for an earlier qualifying install. Here’s what you need:
- IRS Form 5695 (Residential Energy Credits), filed with your federal return
- Your installation invoice showing equipment and labor costs
- The manufacturer’s ENERGY STAR certification statement
- The manufacturer’s four-digit Qualified Manufacturer (QM) code, which became a documentation requirement starting with 2025 installs
For the credit to have applied, gas tankless units needed a Uniform Energy Factor (UEF) of 0.95 or higher and ENERGY STAR certification. Electric tankless models had a separate, less commonly used efficiency threshold. The credit covered 30% of total project cost — unit plus labor, including any new gas lines or venting work required for the install — up to a $600 cap. It was non-refundable, meaning it could reduce your tax bill to zero but wouldn’t generate a refund beyond your actual liability.
If you’re not sure whether your 2025 installation qualifies, your invoice and the manufacturer’s certification page are the two documents to dig up first. A tax professional can confirm eligibility in a few minutes.
What’s Actually Available for 2026 Installs
With the federal credit off the table, the savings landscape for 2026 shifts almost entirely to state and utility programs. These vary enormously by location, but in many states they’re more generous than the old federal credit ever was — especially for heat pump water heaters, which most programs favor heavily over gas tankless units.
State-Level Programs
As of early 2026, roughly two dozen states have active rebate programs for water heaters, many funded through the IRA’s Home Electrification and Appliance Rebate (HEAR) program. A few examples of how aggressive these can get:
- California stacks multiple programs — TECH Clean California and Golden State Rebates can combine for several thousand dollars on a heat pump water heater, though TECH Clean’s single-family funding has been largely exhausted in several regions as of 2026 and new applications may land on a waitlist.
- New York offers utility-administered rebates (NYSEG pays up to roughly $1,250 directly to homeowners) alongside NYSERDA incentives applied upstream through contractors.
- Massachusetts runs Mass Save rebates that can exceed $700, mailed as a direct check within weeks of installation — enough in some cases to cover most of a unit’s cost when paired with other savings.
- Washington and Oregon both offer utility-backed incentives (PSE and Energy Trust of Oregon, respectively) in the $700–$1,100 range for qualifying installs.
A few important caveats: most of these state and IRA-funded programs are built around heat pump water heaters, not gas tankless units, because the policy goal is electrification. Gas tankless models generally don’t qualify for HEAR-funded incentives, though they may still be eligible for narrower utility rebates aimed at efficiency rather than fuel-switching. If you’re committed to gas tankless, your best bet is your local gas utility’s rebate page, not the state electrification programs.
States with no centralized program (Texas is a notable example) still often have rebates available through individual utilities — Austin Energy, for instance, offers one of the more generous utility-level incentives in the state for qualifying installs through approved contractors.
Utility Rebates
Don’t skip this step — utility rebates are often the most reliable money available in 2026, because they’re funded locally and aren’t subject to federal political swings. Most gas and electric utilities maintain a “rebates” or “energy efficiency” section on their website where you can search by zip code or account type. Many of these rebates are applied instantly at the point of sale through a participating contractor, which means you see the discount before you even pay, rather than waiting on a tax refund.
How to Find What You Qualify For
- Start with the ENERGY STAR Rebate Finder (energystar.gov/rebate-finder). Enter your zip code and it surfaces federal, state, and local programs currently active in your area.
- Check your state energy office’s website. State programs change frequently, including funding caps that can be reached mid-year, so this is the most current source.
- Call or check your utility provider directly. Search their site for “rebates” or “energy efficiency programs” — this is where instant point-of-sale discounts typically live.
- Ask your installer. Contractors who specialize in water heater installations usually stay current on local program funding status, including whether a popular program (like TECH Clean California) has hit its cap.
Tankless vs. Heat Pump: Why It Matters for Incentives
If maximizing your incentive total is a priority, it’s worth knowing that the rebate landscape now clearly favors heat pump water heaters over gas tankless units. Most state and utility programs offer little to nothing for standard gas tank or gas tankless replacements, while heat pump models can qualify for incentives reaching into the thousands of dollars in well-funded states. If you’re flexible on technology and your home’s electrical setup can support it, it’s worth pricing out a heat pump water heater alongside a tankless gas unit before you commit — the incentive gap alone can change the math on total cost.
That said, gas tankless units still have real advantages: lower upfront equipment cost in many cases, no dependence on ambient air temperature, and a smaller footprint, which matters for retrofits where space is tight. If gas tankless is the right fit for your home, the lack of federal incentive in 2026 doesn’t change the underlying value — it just means your savings will come from utility programs and long-term energy efficiency rather than a tax credit.
Frequently Asked Questions
Is there still a federal tax credit for tankless water heaters in 2026?
No. The Section 25C credit expired for any equipment placed in service after December 31, 2025, under the One Big Beautiful Bill Act. Installations completed in 2026 do not qualify, regardless of efficiency rating.
I installed my tankless water heater in December 2025 — can I still claim the credit?
Yes, as long as it was installed and operational (“placed in service”) on or before December 31, 2025. Claim it using IRS Form 5695 on your 2025 return, or amend a prior return if you missed it within the three-year window.
What documentation do I need to claim a 2025 installation?
Your installation invoice (showing equipment and labor costs), the manufacturer’s ENERGY STAR certification, and the manufacturer’s four-digit Qualified Manufacturer (QM) code.
Are there any rumors of the federal credit coming back?
Not currently. There’s no pending legislation reinstating Section 25C, and industry experts don’t anticipate a near-term return.
Do gas tankless water heaters qualify for state heat pump rebate programs?
Generally, no. Most state and IRA-funded electrification programs (like TECH Clean California or HEAR-funded initiatives) are built specifically around heat pump water heaters as part of a broader push toward electrification, not gas tankless models.
Where’s the fastest way to check what I qualify for right now?
Start with the ENERGY STAR Rebate Finder by zip code, then confirm directly with your state energy office and local utility, since program funding and caps shift throughout the year.
This article is for general informational purposes and isn’t tax or legal advice. Rebate and credit programs change frequently — confirm current details with your state energy office, utility provider, or a tax professional before making purchasing decisions.
