Tax Deductions for Water Heaters

Replacing an old water heater can help ensure that you always have enough hot water in your home, and it might also save you money on your income taxes. The Internal Revenue Service offers tax breaks for various home improvements that meet certain energy-efficiency guidelines. Tax breaks for hot water heaters are technically tax credits, which can save you more than tax deductions.

Solar Water Heaters

The government offers tax a credit on solar powered water heaters of 30 percent of the cost of the heater, including installation costs, as of the 2012 tax season. The credit applies to new heaters installed in existing homes and new constructions used as primary or secondary residences. Solar heaters must generate at least half of the energy they use to heat water from the sun and provide hot water to the home to qualify. Heaters used to provide water to swimming pools or hot tubs do not qualify. The credit for solar water heaters lasts until the end of 2016, as of publication.

Non-Solar Heaters

The federal government used to offer a tax credit of $300 for energy-efficient non-solar water heaters, but the credit expired at the end of 2011. The credits for non-solar heaters applied to gas, oil, propane and electric heaters installed in existing primary residences that met strict energy-efficiency standards. All ENERGY STAR qualified electric and tankless heaters qualified for the tax credit.

Amended Tax Returns

You can claim credits you missed on tax returns from previous years by filing an amended tax return. If you installed an energy-efficient non-solar water heater prior to 2012 and forgot to claim it on your tax return, you may be eligible for a tax refund if you file an amended return to claim the credit. To file an amended return, you must fill out Form 1040X and mail it to the IRS. Unlike regular tax returns, you can't file amended returns online.

Credits vs. Deductions

Tax deductions and tax credits can both save money on taxes, but they function differently. A tax deduction reduces your taxable income, while a tax credit directly reduces the amount of tax you owe. For example, if your income tax rate is 25 percent, a tax deduction of $300 saves you 25 percent of $300, or $75, on your taxes. On the hand, a $300 tax credit saves you the full $300.