Tired of high utility bills? You're not alone. A CNET survey found 78% of Americans are stressed about their energy bills.

A good place to look for savings is your water heater.

Water heating is one of the largest energy expenses for homeowners across the country, accounting for nearly one-fifth of total electricity costs, according to the US Department of Energy. That costs the average American $400 to $600 per year.

How can you save on these costs? Well, you could run less hot water. And setting the temperature of your water heater a bit lower can help. But there is a balance between comfort and conservation. Another way is to upgrade your water heater to a more energy-efficient option. Upgrading to a new water heater that meets the latest DOE standards could save households more than $100 per year, and some models will produce enough savings to pay for themselves in just a few years.

One thing making that upgrade even sweeter is the upfront savings offered thanks to federal, state and local tax credits and incentives. Not only is it good for the planet, but it's good for your pocketbook, too. We'll guide you through everything you need to know to get the best savings on a new, energy-efficient water heater.

Types of water heaters

There are a variety of types of water heaters that you will encounter when choosing an option for your home. It's best to understand the potential benefits and challenges that each type provides in order to figure out which option is best for the needs of your household. 

Traditional tank water heaters

There are two primary types of standard tank water heaters, which vary based on the type of energy source that is available. Gas tank water heaters use the fossil fuels natural gas or propane to heat water, which is stored in a large tank. 

Electric tank water heaters can heat water using electric resistance coils. These models are generally easier to install and maintain but may have higher operating costs compared with gas.

Tankless water heaters

Tankless water heaters, also known as on-demand water heaters, can heat water directly without a storage tank. They provide a continuous supply of hot water, which can be more energy-efficient since they only heat water when needed.

Matt Kunz, president of Mr. Rooter Plumbing, said choosing between a tank and tankless heater is the most common decision that homeowners have to make. 

"A tank water heater stores and heats large amounts of water and is suitable for homes that have a high demand for hot water. A tankless heater is more energy efficient as it heats water on demand. They are also more space efficient but are typically more expensive upfront," he said.

Heat pump water heaters

A heat pump water heater uses electricity to move heat from the air or ground to heat water. You can think of them as operating like a refrigerator in reverse. While a refrigerator removes heat from inside and releases it into the air, a heat pump water heater pulls heat either from the air (air-source heat pumps) or the ground (geothermal heat pumps) and uses it to heat your water. This method makes them highly efficient, and they can reduce energy costs significantly, especially in moderate climates.

Solar water heaters

There are other water heaters that can be even more energy efficient, though, like solar water heaters. These heaters use solar panels to capture sunlight and convert it into energy for heat, which is then transferred to the water. These systems can provide substantial savings on energy bills, particularly in sunny regions, but typically carry bigger price tags for purchase and have unique maintenance needs. 

Point-of-use water heaters

Point-of-use water heater systems are small units that are typically installed close to the point of use, like sinks or showers. They provide hot water directly where it is being used, heating the water quickly. Most of the time, these systems are used to supplement larger systems.

Federal tax credit for water heaters

As you are searching for the right water heater for your home, keep in mind the incentive programs that are available for your purchase. "There are federal and local incentives and credits available to homeowners when purchasing a new water heater," Kunz said. "Every program and credit are based on different homeowners' needs, so it's important to do your homework to find the incentive that best fits your needs to see if you qualify."

There are two primary federal tax credits available that help to cover the cost of your upgrade: The Energy Efficient Home Improvement Credit and the Residential Clean Energy Credit. 

Energy Efficient Home Improvement Credit

The Energy Efficient Home Improvement Credit is part of the Inflation Reduction Act of 2022 and incentivizes homeowners to invest in energy-efficient upgrades, including certain water heaters. 

Eligible systems can include electric heat pump water heaters, gas water heaters with a certain energy efficiency rating and more. Homeowners can claim a tax credit of up to 30% of the cost, with a maximum credit limit of $1,200 per year, and up to $2,000 per year for qualified heat pumps. Qualifying heat pumps must meet or exceed the Consortium for Energy Efficiency's highest efficiency tier. 

This credit helps offset the upfront costs of purchasing and installing qualified energy-efficient water heaters, making it an attractive option for those looking to enhance their home's efficiency. Credits are claimable for home improvements made through 2032.

Residential Clean Energy Credit

The Residential Clean Energy Credit specifically targets renewable energy technologies, including geothermal heat pumps and solar water heaters. 

Homeowners can receive a tax credit of 30% of the installation cost for qualified geothermal systems through 2032, with descending credit rates still available in the years following. Unlike the Energy Efficient Home Improvement Credit, this credit does not have a maximum limit, allowing homeowners to potentially benefit significantly based on the total installation costs.

Other water heater rebates and incentives

In addition to federal tax credits, there may be other incentives available to you based on where you live. To find information about state, municipal or utility company-offered incentives for energy-efficient water heaters, homeowners can start by visiting government websites, particularly those of state energy offices or departments of energy, which typically provide information on available incentives and programs. Check your utility company's website as well for any rebates and incentives offered for energy-efficient appliances. 

Other rebates authorized and funded by the IRA are implemented by individual states. To see if your state has opened up applications for rebates, check out this database from the DOE. 

You can also sift through online incentive databases like the Database of State Incentives for Renewables and Efficiency, which compiles incentives at state and local levels and allows you to search by location and technology. Note that the database may not be comprehensive, and programs listed may have changed, but it is a great starting point.