It is important not to get confused between home repair and improvement, particularly from the point of view of taxes. Home repairs, like renovating a home or making permanent additions to the home, increase the value of the house while making it more habitable. This does not count towards tax deduction or credit.
However, if you replace energy-efficient windows or doors for your home (falls under home improvement) or apply for home improvement loans, for the purpose of making certain improvements, then it qualifies for tax deductions.
A tax deduction reduces the amount of taxable income. A tax credit, on the other hand, reduces the actual amount of tax that a person has to pay. Hence, a tax credit is better than a tax deduction, as the former reduces the actual tax liability. The following equation will explain it to you in a short and precise way:
Expenses for Home Improvement – Increase in the value of the home because of improvements = Amount that qualifies for a tax deduction
Home Improvement Plans That Qualify for Tax Deductions
Interest and Points on Home Improvement LoansInterest paid on a home equity loan or a home equity line of credit availed for the purpose of making capital improvements on the home, are fully tax deductible. Capital improvements are those that increase the worth of the home, prolong its depreciable life or adapt it to new uses. Points purchased for obtaining a home improvement loan, at a favorable rate of interest, are also fully tax deductible provided the following conditions are met:
✔ The loan or the line of credit is secured by the main home.
✔ Points purchased are in accordance with the established practice of buying points.
✔ Points purchased were not more than the points usually paid for availing such loans.
✔ The taxpayer uses the tax method of accounting.
Expenses on Home Improvements on Account of Medical ReasonsMedical expenses, that one pays for oneself, one’s spouse and dependents, qualify for tax deductions. Home improvements that have been undertaken for medical reasons, also qualify as medical expenses and are thus, tax deductible. For instance,
✔ People suffering from heart ailments can install an elevator in the house, to avoid climbing the stairs, and can claim a tax deduction citing medical reasons.
✔ Improving the home’s air filtration system by installing central air conditioning or removing a drywall that may be damp and moldy can help abate the symptoms of asthma in people experiencing breathing difficulty. The doctor may have to provide a letter stating the necessity of making these improvements.
✔ All reasonable costs incurred to accommodate a handicapped individual, qualify for deductions.
Expenses on Home Improvements for Energy-efficient UpgradesThere are several home improvements and upgrades to enhance energy efficiency, but it is tough to be aware of the discounts and tax incentives that an individual is entitled for, the reason being there are many federal and state regulations applicable in some cases. Following are some instances, which could affect your income taxes:
✔ Constructing entrance and exit ramps for the home and widening the doorway at the entrance and the exit to the home, in order to help handicapped people to live at home
✔ Installing railings and support bars along the stairway and in the bathroom
✔ Modifying the kitchen to make it easily accessible to people with disabilities
✔ Modifying electric outlets and fixtures
✔ Installing lifts and leveling the ground
Other home improvement expenses that qualify for tax credits till 2016 (this include new and already existing homes) are:
✔ Installing geothermal heat pumps
✔ Setting up solar water heaters and panels
✔ Installing wind energy systems or fuel cells
In addition to tax deductions for home improvements, the government is also giving tax credits for making the home environment friendly. Energy Star was initiated as a voluntary labeling program in 1992, by the United States Environmental Protection Agency, to identify and promote energy-efficient products in order to reduce energy consumption and greenhouse gas emission. A number of new homes qualify as Energy Star homes since the appliances used in these homes bear the Energy Star label.
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