Which Home Improvement Tax Deductions and Credits Can You Take

Making home improvements can change your tax outlook. Though home improvements are typically done in the spring, the recent mortgage meltdown accelerated the pace of renovations, with many homeowners taking this route over trying to buy a new home. Depending on their situations, more homeowners may soon be qualifying for home improvement tax deductions or credits.

Home Improvement Tax Deductions
You may claim a deduction for repairs made due to medical reasons. Items like ramps, elevators, raised sinks and wider doorways may qualify as a home improvement tax deduction. Remember to keep accurate spending records. and keep all of your receipts to make the right deductions when the time comes. It is virtually impossible to recreate these sorts of records after the fact and even more difficult to defend those sorts of records to the IRS in the event of an audit.

Home Improvement Tax Credits
Thanks to the Energy Policy Act of 2005, which was created in response to record energy prices, the IRS allowed tax credits for certain home improvements. Home improvement tax deductions reduce your taxable income, meaning you're taxed at a lower income than you might have been taxed otherwise. Tax credits, on the other hand, directly reduce the tax you pay.

Some tax credits are available for home improvements that increase the energy efficiency of your home. However, parts of the Energy Policy Act of 2005 have been allowed to expire. According to the Department of Energy, if you want to take these tax credits, "Tax credits for improvements to new homes were extended until December 31, 2008, however tax credits for improvements to existing homes ended on December 31, 2007." Energy Star adds, "The tax credit for solar water heaters and solar panels remains in effect through December 31, 2008." Since these tax credits are in flux, make energy-efficient home improvements because you want to save energy and money in the long-term, not because you expect a short-term tax credit.

What Doesn't Count
If you're looking to maximize your home improvement tax deductions, understand the difference between home improvements and home repairs. A home repair means you're fixing something that's broken, like a leaky pipe or broken doors. These repairs don't add value to your home, and you won't receive a home improvement tax deduction. A home improvement includes remodeling kitchens and baths, adding a garage or finishing a basement.

The Internal Revenue Service has fairly strict standards and guidelines regarding what a homeowner can claim as a home improvement tax deduction or credit. As such, you should discuss your plans with a tax consultant or become intimately familiar with the IRS's tax deduction guidelines before you take a sledgehammer to the wall between your kitchen and living room.

Also, despite the IRS's general prohibition against receiving tax deductions for home repairs, there are exceptions. For example, if a certain part of your home needs repair, you might be able to qualify for a tax deduction. As a general rule, if the repair is necessary in the same part of the house as the improvement, the repair may qualify as part of the home improvement project. As such, if you remodel your bathroom and take care of the leaky sink and the toilet that runs constantly you can claim a home improvement deduction or credit for the entire project.

Don't Get Carried Away
While the IRS gives certain latitude in claiming home improvement deductions, it also carefully examines the home improvement deductions you claim. Be aware that your idea of acceptable home improvements might differ from that of the IRS, and that is a fight you're likely to lose.

Over the Long Haul
If your renovations don't fall in these tax deduction and tax credit categories, you may receive a tax benefit if the renovations increase the cost basis of your home. In this case, a higher cost basis will reduce your tax burden when you make a sale. However, you still need to keep meticulous records.

Related Life123 Articles

Many homeowners seek insight on home improvement tax credits and tax deductions that will help save them money. Knowing which ones you qualify for can make a difference in what you owe the government.

Homeowners may be seeking tax deduction tips when planning for major renovations and improvements within the home. Consult with an expert tax advisor first because few home repairs and improvements meet the strict IRS standards.

Frequently Asked Questions on Ask.com
More Related Life123 Articles

A U.S government report estimates the average person pays $400 each year because of missed tax breaks and savings incentives (401K, Roth IRA and IRA plans). For example, according to a 2002 Government Accounting Office report, would you believe nearly one million people failed to itemize there home mortgage interest?

When taxpayers look for federal and state tax deductions, home improvements are often overlooked. Many homeowners are unaware that the IRS allows for certain tax credits on federal income taxes that pertain to home improvements.

Homeowners may be seeking tax deduction tips when planning for major renovations and improvements within the home. Consult with an expert tax advisor first because few home repairs and improvements meet the strict IRS standards.

© 2014 Life123, Inc. All rights reserved. An IAC Company