Home Improvement Tax Deductions and Credits
(a DIY Home Improvement Blog)
A lot of people wonder if the home improvements and home repairs they perform on their house over a year are tax deductible or eligible for any money back on income taxes at the end of the year. Most people know that many of the home improvements which improve the energy efficiency of your home are eligible for some sort of tax deduction or tax credit, though each year the amount of money you can deduct gets smaller and smaller. But there are other types of home improvements that have nothing to do with energy efficiency that may also help reduce your income taxes in the year those improvements were finished.
Overview of Tax Credits and Deductions for Home Improvements
Generally, there are three ways a home improvement might benefit you financially come tax time. You may be eligible for some sort of income tax relief if:
- Your home improvements are being performed for medical reasons
- Your home improvements include certain energy-efficient upgrades to your home
- You are going to be using a home equity loan or home equity line of credit to actually pay for your home improvements
Before we get into those three scenarios, let’s discuss the basics of how home improvements work with taxes in the United States.
Home Repair vs. Home Improvement
First, it’s important to remember that there is a difference between home repair and home improvements, especially from an income tax perspective. Simply fixing things that are broken or worn out around your home are generally considered “home repairs” and generally do not count towards any sort of tax deduction or tax credit. However, if you replace something that is worn or broken with something new (such as more energy efficient windows or doors), then that may be seen as a home upgrade or home improvement and contribute to your tax refund.
The good news is that if you need to perform a home repair at the same time or in the same area of your home as the home improvement, then you may be able deduction the cost of the home repair on your taxes. The difference between a repair and an improvement on your home is not always cut and dry so your specific situation may dictate exactly how you can count certain home projects on your taxes.
Getting Your Home Improvement Tax Deductions and Credits
The way home improvement contractors advertise the tax credits for energy-efficient appliances and upgrades you’d think that the Federal Government simply mails you a big check whenever you have one of these home improvements done on your home, but it doesn’t work that way. You will have to pay the full amount up front for any home repair or improvement you do, including paying for the materials and labor. After you’ve paid the bill in full and you have a receipt from the contractor for the work done you are ready to receive your credit.
But first you have to wait for the calendar year to end. Once January or February rolls around and you’re filing your income taxes for the previous calendar year you’ll have to pull out that contractor’s receipt and enter it on your tax forms. In most cases the materials for the home improvement can count as a taxable expense, but the labor you paid the contractor does not. Make sure your contractor splits that out on his or her receipt. If you did the work yourself then you should be okay because you’ll probably only have receipts for the materials and supplies.
After entering that amount on your tax forms you or your accountant will run the calculations and you may receive a larger tax refund at the end of the year. So your home improvement tax credit will not come in the form of an outright check, but it will be built into your tax refund or it will lessen the amount of income taxes you owe.
Home Improvement Tax Deduction vs. Home Improvement Tax Credit
It’s also important to remember that there are different ways to increase your income tax refund with home improvement projects. In some cases you may be eligible for a tax deduction and in other cases you may be eligible for a tax credit. The difference could be substantial.
A tax deduction lowers your “taxable income” amount while a tax credit takes a set amount right off the taxes you owe. So If you make $30,000 per year and you get a $1,000 tax deduction then the government is really only taxing you on $29,000. The amount you get back from a tax deduction depends on your income tax bracket. If you’re in the 30% income tax bracket then a $1,000 tax deduction means you’d “get back” about 30% of that money in a tax refund. In this case it would be about $300.
If you get a $1,000 tax credit then are are still being taxed on $30,000 but you get to take $1,000 off the amount you owe the government (if you are getting a tax refund then you might get an extra $1,000 back!).
If you have an account or use any sort of income tax software to do your taxes, you shouldn’t have to worry too much. They can take care of the math and some of the tax software programs will even look at a couple different scenarios and pick out the one that is most beneficial to you.
Home Improvements for Medical Reasons
If you or someone living in your home has a medical condition that warrants a home remodeling or home improvement, then the cost of that project may be able to count towards a tax deduction. You will most likely need a doctor to write a letter stating what improvements are needed to your home for medical conditions and why, you will need to itemize the your deductions and keep track of the work being done with a breakdown of costs and the project will have to be 7.5% or more than your annual adjusted gross earnings for that year.
Here are some of the medical conditions that often require home improvements or upgrades to a home that could be tax deductible:
Home Improvements for Wheelchairs: People suddenly needing a wheelchair must often perform extensive work on their home to make it more livable. Some home improvement projects that could qualify for tax deductions in this case are adding elevators, widening doorways, adding wheelchair ramps, lowering kitchen cabinets, installing bathroom handrails and even lowering light switches.
Home Improvements for Allergies or Breathing Problems: People with breathing issues are often told by doctors to improve their home’s air filtration system, install central air-conditioning and remove and replace any drywall that may be damp and moldy.
Home Improvements for Other Physical Ailments: Other ailments or injuries requiring physical rehabilitation could also warrant specific tax deductible home improvements such as hot water spas, therapeutic swimming pools or other additions to a home to accommodate special medical equipment.
IRS Publication 502 has more detailed information about exactly what may and may not qualify for a medical home improvement tax deduction.
Home Improvements to Increase Energy Efficiency
For 2011 and 2012 most of the energy conservation tax credits and deductions from the past have been extended and are still active. In 2008 there were a number of energy efficient upgrades that were no longer eligible for tax credits or deductions (they were part of the 2005 Energy Policy Act), but many of those items are once again eligible for tax credits in 2011 due to the new American Recovery and Reinvestment Tax Act of 2009. There are lots of different options, but now tax credits are available for 30% of the cost of certain energy efficient upgrades, up to $1,500 in many cases! That means that if you spend $3,000 in qualified energy efficient home improvements, you could get a tax credit of about $1,000 (30% of $3,000). This is a big improvement over the previous energy efficient home improvement tax credits available in the past. So, in theory, you could spend up to $4,500 in qualified energy-savings home improvements and receive a maximum of $1,500 back on your federal income taxes.
Home improvements and upgrades to increase your home’s energy efficiency are numerous and constantly changing. It’s actually difficult to keep track of all the rebates and tax incentives you may be eligible for because there are federal regulations, state regulations and even separate utility rebates available in some cases.
Some examples of energy efficient home improvements for existing homes that could impact your year end income taxes:
- New energy-efficient windows and doors
- Adding new insulation
- Upgrading to a metal or asphalt roof (Metal and Asphalt)
- Upgrading to a more energy efficient air conditioning or heating system
- Newer non-solar water heaters
- Purchasing a biomass stove
It is important to remember that you can only consider the cost of the products you are installing and not the additional installation cost. Other home improvements that are eligible for tax credits for new and existing homes that extend into 2016 are:
- Geothermal heat pumps
- Installing solar water heaters
- Installing solar panels
- Installing wind energy systems or fuel cells
There are, of course, some restrictions on exactly what is eligible for the home improvement tax credit and what isn’t. Before you purchase any new items or upgrade your home you may want to read all the details of the recently updated Federal Government Energy Star Tax Credit program.