Article From HouseLogic.com
By: Gil Rudawsky
Published: September 21, 2009
Cut your energy bills and your IRS bill by purchasing a new water heater that’s eligible for a $1,500 federal tax credit.After heating and cooling costs, the largest energy expense for most homeowners comes from warming up water for doing dishes, washing laundry, and taking showers. According to Energy Star, a federal program that promotes energy-efficient products and practices, the average household spends between $400 and $600 annually on water heating.
You can take a bite out of those costs by upgrading to an energy-efficient gas tankless water heater. A typical home can reduce water-heating expenditures by about $115 a year with this type of system. A gas tankless water heater installed in your existing primary residence in 2009 or 2010 qualifies for a $1,500 federal tax credit. The credit for these heaters is based on 30% of the total cost.
The cost of going tankless
Expect to spend between $1,500 and $2,500, including installation, for a tankless water heater that runs on either natural gas or propane. The cost could go higher if you don’t already have a gas line running to your old heater. Even if you do, you may need to have the line and gas meter upgraded, and possibly enhance your venting, says Mark Petrarca, spokesman for water heater manufacturer AO Smith in Milwaukee.
The IRS excludes installation costs on some other energy improvements eligible for the $1,500 tax credit, but for water heaters installation counts. Save receipts and a certification statement from the manufacturer. You’ll need to file IRS Form 5695. Consult a tax adviser.
Tankless systems save energy by super-heating water on demand. Conventional storage tank water heaters warm water whether you’re using it or not. Tankless water heaters that qualify for the tax credit must have an energy factor of at least 0.82 or a thermal efficiency of at least 90%, according to Energy Star. These ratings are marked on the unit. Energy Star offers a list (http://www.energystar.gov/index.cfm?fuseaction=gas_tankless.display_products_pdf) of qualified gas tankless water heaters. Electric tankless water heaters aren’t eligible for the tax credit.
Another plus, tankless systems are much smaller than traditional storage tank water heaters. They take up about half the space and can be mounted on a wall. They last longer too. On average, you get 10 years out of a traditional water heater; tankless systems last up to 20 years. There’s also less chance of rusting and leaking with tankless heaters.
Other types of water heaters
There are other types of water heaters (http://energystar.custhelp.com/cgi-bin/energystar.cfg/php/enduser/std_adp.php?p_faqid=5703) than gas tankless systems, but most are either impractical for the average home, not yet widely available, or ineligible for this federal tax credit. In addition to electric tankless water heaters, electric storage tank water heaters don’t qualify for the federal tax credit. The energy savings from these electric systems is minimal. The only gas storage tank water heaters that meet the energy-efficiency requirements of the tax credit are too large for standard residential use. Solar water heaters are eligible for a separate federal tax credit, not the $1,500 one.
If you can wait, two new water-heating technologies eligible for the $1,500 tax credit should become more widely available in 2010. Gas condensing water heaters (http://www.energystar.gov/index.cfm?c=gas_cond.pr_gas_condensing) are similar to gas storage tank heaters, but they make more efficient use of gas. Annual savings is similar to a gas tankless system. More intriguing are electric heat pump water heaters (http://www.energystar.gov/index.cfm?c=heat_pump.pr_heat_pump) that use pressure to heat a liquid refrigerant that in turn heats water in a storage tank. Heat pump water heaters will likely cost a bit less than tankless systems, and the average annual energy savings is much higher: $290 vs. the $115 you get from going tankless.
Marci Sanders, senior manager at D&R International (http://www.drintl.com), which works with the Energy Star program, estimates the payback period for upgrading to a gas tankless system is between eight and 10 years. With the new electric heat pump heaters, the payback period is about three years. If you have a perfectly good storage tank water heater purchased within the last decade, you can likely save from $20 to $50 on annual energy costs simply by covering your existing hot water heater with an insulating blanket and turning down the heater’s thermostat.
Don’t wait until it’s too late
If your current water heater is starting to show wear and tear, like rust or small leaks, it’s time to look for a new one. Most homeowners end up replacing a water heater only after it stops working. Bad idea. When a water heater fails, there’s the potential for a big, wet mess. There’s also the inconvenience of living without hot water. Worse, panicked homeowners tend to rush into a purchase without shopping around or weighing the benefits of newer technologies.
When you’re looking to upgrade, first make sure the unit qualifies for the federal tax credit. Next, you want to figure out how big of a unit to get. Tankless models are rated by how many gallons of hot water they produce per minute. How much hot water you use at one time will determine what makes sense for your home. Do you take long showers while running the dishwasher and washing machine? Consult a plumber, but figure 3 gallons per minute should be sufficient for most families.
This article provides general information about tax laws and consequences, but is not intended to be relied upon by readers as tax or legal advice applicable to particular transactions or circumstances. Readers should consult a tax professional for such advice, and are reminded that tax laws may vary by jurisdiction.
Gil Rudawsky has been covering business and consumer issues as a reporter and an editor for 18 years, most recently as a business editor at the Rocky Mountain News. He lives in a house built in the 1930s, and always keeps the home’s character in mind when making upgrades.
Reprinted from HouseLogic (houselogic.com) with permission of the NATIONAL ASSOCIATION OF REALTORS®
Copyright 2009. All rights reserved.