there are two separate credits, one for energy efficient improvements such as efficient doors, windows, furnace, or hot water heater; and a separate credit for alternative energy sources such as solar power or geothermal or wind power. Both credits are claimed on the same form 5695.
The tankless hot water heater may be eligible for a credit of 10% of the price of the unit not including installation. The hot water heater must have a Uniform Energy Factor of at least 0.82 or a thermal efficiency of at least 90%. The maximum credit is $300, and there is a maximum lifetime credit for all energy efficiency improvements to your home of $500, so if you have claimed a credit in the past for a furnace or insulation or doors and windows, your credit now may be limited. To claim the credit, you will need an invoice from the contractor that lists the price of the hot water heater separately from the price of installation. Otherwise, if you are audited and unable to prove the cost of the unit separate from installation, the credit may be denied.
A water softener or water treatment system is not eligible for any tax credits.
The solar system is eligible for a tax credit which I think is 26% this year; it is gradually being phased out from the original 30%. This includes the cost of installation as well as the cost of the equipment itself.
Both the tankless hot water heater and the solar credit are found under the energy efficient credit section on the deductions and credits page.
