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. The short answer is: Maybe.
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, have you benefited from our affiliate service with I.R.E Repair Services? It was founded to help homeowners find reliable, high-quality home improvement contractors and home service professionals with the convenience of just a phone call or email. Everyone knows that finding reputable, quality contractors can be quite a difficult feat. Our goal is to save the homeowner time and money, by having a network of pre-screened professionals in a large variety of home improvement specialties so the homeowner can complete their special project confidently and worry-free.
Now, 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.
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 remodelling 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
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.
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 2009 and 2010 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! That means that if you spend $3,000 in qualified energy efficient home improvements, you 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.
Some examples of energy efficient home improvements for existing homes that could impact your 2009 and 2010 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
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 .
Additional Home Improvement Tax Savings
There are other ways home improvements can save you money when you file your income taxes. Firstly, if you borrow money from a home equity loan or a home equity line of credit then you may very well be able to use the interest you paid on the loan as a tax deduction. This is just like using the interest you pay on a mortgage loan as a tax deduction, and obviously the larger the home improvement loan, the more money you’ll pay in interest (and the more you’ll be able to deduct at the end of the year).
The other way to use a home improvement to your advantage is to donate any extra materials or supplies at the end of your project to a registered non-profit. If, for example, you’re installing new hardwood floors you probably would not be able to deduct the cost of the wood because it isn’t an energy savings, but if you had several hundred dollars worth of wood left over (which is quite possible) then you could donate that to a non-profit school or church that could use it for a project. Be sure to keep receipts and give the wood a real market value when you use your donation as a tax deduction.
And, of course, most larger home improvements impact the value of your home positively, so if you’re trying to sell your home any home improvement could affect the selling price and appraisal value, though some home improvement projects do affect the value of your home more than others.
Summary
Overall, you can count some home improvements as a tax credit or tax deduction if they are for medical reasons or if they fall into one of the many energy-savings home improvement categories. You may also be able to use your home improvement project to deduct additional interest or donated amounts from your taxable income at the end of the year. Everything above is included for informational purposes, but obviously your tax and financial information may affect how much of these credits and deductions you can really use. Before you do any home improvement you will definitely want to speak to a qualified tax accountant to see exactly how certain projects will impact your income tax payments.
It really can pay to start that home improvement project this year! Under the right conditions a home improvement project completed this year could lead to big home improvement tax credits and deductions when you file your taxes next year!
