It may be the end of summer, but some of us are still thinking about unlocking our inner Bob Vila and fixing up our homes. Whether it's building a new deck, remodeling our bathrooms, or just replacing some old windows, did you know you can save money when you make home improvements through tax deductions or tax credits?
Tax deductions reduce your taxable income, meaning you're taxed at a lower income than you might have been taxed otherwise. It is subtracted "off-the-top" from the amount of money you made throughout the year, your gross income. Tax credits, on the other hand, directly reduce the tax you pay. They are dollar-for-dollar reductions which are subtracted from your tax liability. Both are widely used by eligible homeowners to save money on their home improvements.
If you're wondering which improvements make you eligible for tax deductions or tax credits, it's good to know how they are determined. If your improvements match any of these criteria, it's a good bet they're tax deductible or make you eligible for a home improvement tax credit.
Does it make your home more energy efficient?
There are a number of improvements that could fall under this category. These include energy-efficient exterior doors and windows, skylights, insulation, central air and heating, main air circulating fans, solar panels, solar-powered water heaters, and fuel cells. Look for ENERGY STAR-approved products, as many of them make you eligible for a home improvement tax credit.
Does it add value to your home?
Remodeling your kitchen or bathroom is the most common tax-deductible home improvement project. Other projects that add value to your home include finishing or re-modeling your basement, adding an addition, replacing the entire roof, paving the driveway, and major rewiring. Be aware that painting a room, replacing carpet, and fixing leaks or walls do not qualify for a tax deduction and do not add value to your home if you were to sell it or get an appraisal for a home loan.
Does it enable your home to accommodate new uses?
Wheel chair ramps for the disabled, bathroom railings for those who need the support, elevators, and lowering light switches are all tax deductible. These improvements add function and make your home friendly to those who have a disability.
Remember, keeping the receipts and an accurate spending record of each improvement you have made will help reduce the potential taxable gain when selling your home. This will ensure that you are well prepared to defend your records in case of an audit. While it's important to do research on your home improvement project, you should always consult a professional tax advisor for details. Also, make sure to consult a home loan expert in case your goal is to refinance.
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