Tankless water heaters  are small wall mounted  units that heat water only when needed by using an electric coil or natural gas to heat water passing through a network of copper pipes inside. This eliminates the risk of a tank failure and the energy lost by constantly reheating water. Two of the most popular tankless water heaters are the Bosch AquaStar 2700ES NG (natural gas) and Bosch AquaStar 2700ES LP (propane) .  Typically the gas-fired tankless water heaters will produce higher flow rates than an electric tankless which is why I use and recommend the Bosch ones you see above. Some of the smaller tankless systems you might find cheaper online or at Home Depot cannot supply enough hot water for simultaneous usage in a large household so be careful when making a selection. The Aquastar 2700ES delivers 7 gallons per minute( enough to run several fixtures at once), electronic ignition( no standing pilot light), direct vent combustion, remote thermostat, and a 12year warranty on the heat exchanger with a 2year warranty on parts

     For your installation make sure you check local building code requirements and/or have a qualified plumbing , heating, or general contractor help you with your installation. Whether you choose gas or electric they should be able to help you make sure the gas venting requirements or the electrical wiring requirements are met. Remember the proper installation/maintenance of your system can optimize the energy efficiency and help it last for decades.

  
  Guidelines for the Tax Credit can be viewed on the ENERGY STAR website. 

     The average life expectancy of a tankless system can be over 20 year where a standard tank might last 10-15 years. A tankless system can have an energy savings of up to 50% and most are energy star rated. To make things even better this item qualifies for a Federal Tax Incentive equal to 30% of the purchase and installation cost up to $1500. Theses home improvement tax credits are available for energy-saving home improvements that are placed in service in your primary residense from January 1, 2009 through December 31, 2010.  

     You can also check   http://www.dsireusa.org/. DSIRE is a comprehensive source of information on state, local, utility, and federal incentives and policies that promote renewable energy and energy efficiency. There you find information for all state and local Incentives/Policies for Renewables & Efficiency.

Click here for information on how to apply for the energy tax credit

(IRS) guidelines for consumers can be viewed here: IRS Notice 2006-26