Are you looking to make your home improvement work for you?
When planning your home improvement projects, you can be specific about ways to reduce taxes through tax deductions and tax credits.
The Cost of Home Improvement Vs the Cost of Repairs
Capital improvement better known as home improvement is improvement that brings profit to your home such as a new bathroom, swimming pool, a new roof, basement finishing or a new central air-conditioning. Other improvements like adding an extra water heater, adding storm windows, adding intercom, or a home security system also can increase your home’s value.
Home value increase is what the IRS counts as the distinguishing value for home improvement. Cost of repairs to return an item to the original condition do not count; items including painting a room, replacing a window, or fixing the gutter are counted as fixes for an item that is broken rather than overall improvement
Tracking Not as Critical
Home sale profits are tax free up to $250,000, and up to $500,000 for married couples who file joint tax returns; other stipulations include if you have owned and have lived in a home for at least 2 of the 5 years leading up to the sale. You should still track your improvements, especially if your house has the propensity to score a quarter or a half million in profit of a home you have owned for many years; it pays in the long run. Use a designated folder for all your receipts, large and small to do with your home as well as any records, contracts, or plans.
Home Remodeling When You Buy Your House
Your mortgage may include additional money to make renovations in the acquisition cost of your home. Take advantage of any credits to invest in home improvement up front, and write in your cost in your taxes that year.
Learn How to Increase Your Home`s Value
How to Reduce Tax for Medical Home Improvements
If you have medically necessary home improvements, then home remodeling for medical reasons may be tax deductible. Widening hall ways, installing hand rails, installing a stair lift, installing entrance or exit ramps, lowering cabinets, modifying bathroom such as baths, toilets, and sinks all are covered. The deduction amount must be “reasonable”, have a medical reason stated, and any upgrades that are architectural and aesthetic in nature are not deductible. Any improvements to your home may not be claimed as a medical expense.
How to Reduce Taxable Income by Energy Generation Implementation
Install qualified energy generating systems. Home improvements including solar panels, solar water heaters, solar systems, geothermal heat pumps, small wind turbines, or fuel cells can earn you a tax credit of 30% of the cost regardless of your tax bracket. This cost includes parts, labor, and installation with no limit of spending except for fuel cells.
If you have a second home or a vacation home, the above improvements albeit fuel cells also apply when deciding how to reduce your taxes. Solar credits are valid until 2019 and beyond are reduced each year.
The tax credit deduction of 30% of your cost does not include any energy savings from improvements. For example, if you install $10,000 worth of solar panels, you are eligible for a $3,000 tax credit right away plus all the savings from solar thermal and electric energy. To claim this tax credit, be sure to claim the savings the year the improvement was made and include a Manufacturer Certification Statement.
Tax Income Bracket and Capital Gains Tax
To find capital gains or amount that you profit from a home sale, add the cost of capital improvement to your tax basis of the house. Your tax basis is the amount you will subtract from the sales price to determine the amount you profit. Most income tax brackets for homeowners set the capital gains tax at 15%; if you are in the highest income tax bracket of 39.6%, the capital gains tax rate is 20% of any capital gains.
The original payment for your house (original purchase price, fees and services) plus all home improvements made is called your “adjusted basis”. Compare the adjusted basis with what your new sale price is for the home; if you made a profit, that amount may be taxable but loses are individual personal homes are not deductible.
Do not take liberty tax when you are thinking about listing tax credit write offs. Tax credits and deductions need to be validated with documents for cost, medical reasons, and other verifications.
To find out how you can plan your home improvement in correlation with tax credits, learn more here.