How to Apply for Tankless Water Heater Tax Credit

1). Obtain an approved tankless water heater. For a list of approved devices, visit the Energy Star website at EnergyStar.gov.
2). Save the receipt confirming your purchase. Ask the retailer or manufacturer for a Manufacturer's Certification Statement. This document certifies, with the full weight of the U.S. Department of Weights and Measures, that the water tank in fact increases the energy efficiency of the appliance as stated on the specifications.
3). Ensure the appliance is "placed into service" prior to Dec. 31, 2011. "Placing into service" means that the device is fully installed, fully operational (as confirmed by an inspector) and the older water tank is no longer servicing the home.
4). Hire a home inspector to complete a report on the new water heater. This will provide foolproof evidence that a tax credit is warranted. This document is not necessary, but will simply offer professional confirmation.
5). Speak with your accountant about the water heater when completing your 2011 tax returns in 2012. The correct form to use to claim the credit is IRS Form 5695.
6). Follow-up with the IRS if you discover the credit was not applied to your tax liability or left out of your tax refund.