Generally, making repairs and updates to your home is not something you can write off on your tax return – but there are some projects and circumstances that provide exceptions. Keep reading to learn the details of three home improvement categories that can help you save on taxes.
Energy-Efficient Home Improvements
The Inflation Reduction Act (IRA) amended the energy efficient home improvement credit and increased amounts for years after 2022. Beginning January 1, 2023, the amount of the credit is equal to 30% of the sum of amounts paid by the taxpayer for certain qualified expenditures:
- Exterior doors: 30% of costs up to $250 per door, up to a total of $500.
- Exterior windows & skylights: 30% of costs up to $600.
- Insulation materials or systems & air sealing materials or systems: 30% of costs.
There is a credit of 30% of costs up to $150 to conduct a home energy audit.
A credit of 30% of costs up to $600 for the following:
- Central air conditioners.
- Natural gas, propane, or oil water heaters.
- Natural gas, propane, or oil furnaces and hot water boilers.
- Improvements/replacement of panelboards, sub-panelboards, branch circuits, or feeders installed with building envelope components or other energy property listed in the IRS FAQ page and enable its installation and use.
There is a credit of 30% of costs (including labor) for the following:
- Electric or natural gas heat pump water heaters.
- Electric or natural gas heat pumps.
- Biomass stoves and biomass boilers.
Of course, there are rules and limits with the total credit you could take maxing out at $3,200. You can take up to $1,200 for building envelope components, home energy audits, and energy property. The electric or natural gas heat pump water heaters, electric or natural gas heat pumps, biomass stoves, and biomass boilers have a separate aggregate yearly credit limit of $2,000.
A quick note: these are CREDITS, not DEDUCTIONS. Both a credit and a deduction can save you money, but you actually save more dollar-for-dollar with a credit. A tax deduction reduces your taxable income. For example, if you earn $100,000 and claim $10,000 in deductions, you’ll be taxed on $90,000. A tax credit reduces your tax bill dollar for dollar. Let’s say you owe $20,000 in taxes and have a $2,000 federal tax credit. The tax credit would reduce your tax bill to $18,000.
Home Improvements for Medical Reasons
Medical-based home improvements are not new nor are they set to expire. A taxpayer can deduct the part of their medical/dental expenses that is more than 7.5% of their adjusted gross income (AGI) – and there are many expenses that can be included. For medical-based home updates, you can include the amounts you pay for special equipment to be installed in a home as well as improvements – as long as the main purpose of the improvement is medical care for you, your spouse, or your dependent.
To determine the amount, take the increase of the home’s value and subtract the cost of the improvement. The remaining difference is the medical expense. (If there is no increase in value because of the improvement, you can count the entire cost). Here are some examples of home improvement medical expenses:
- Constructing entrance or exit ramps for your home.
- Widening doorways at entrances or exits to your home.
- Modifying areas in front of entrance and exit doorways.
- Grading the ground to provide access to the residence.
- Lowering or modifying kitchen cabinets and equipment.
- Moving or or modifying electrical outlets and fixtures.
- Modifying fire alarms, smoke detectors, and other warning systems.
- Modifying stairways.
- Widening or otherwise modifying hallways and interior doorways.
- Modifying hardware on doors.
- Installing railings, support bars, or other modifications to bathrooms.
- Adding handrails or grab bars anywhere (whether or not in bathrooms).
- Installing porch lifts and other forms of lifts (elevators generally add value to the house).
Capital improvements are the most common home improvement option to save money on taxes. A capital improvement is something that adds to the value of your home to increase the basis. While you can’t write off the expense of a capital improvement, it can help you in the long run by saving money on taxes when you sell. To be considered a capital improvement, the change to your home must be considered an “improvement” and not a “repair”. An improvement adds value by prolonging the life of the property, enhances its value or adapts it to a different use. A repair just keeps property in efficient operating condition.
The exception is if you make repairs as part of larger project. You can include repair-type work if it is part of an extensive remodeling or restoration job. The IRS provides the following example: If you replace broken windowpanes, that is a repair, but replacing the same window as part of a project of replacing all the windows in your home counts as an improvement.
Here are lists of what examples for what can and can’t be considered a capital improvement:
Can Include as a Capital Improvement
This includes adding any of the following: Bedroom, bathroom, deck, garage, porch, patio.
System include: Heating system, central air conditioning, furnace, duct work, central humidifier, central vacuum, air/water filtration systems, wiring, security system, lawn sprinkler system.
Lawn and ground capital improvements include adding these: Landscaping, driveway, walkway, fence, retaining wall, swimming pool.
Septic system, water heater, soft water system, and filtration system upgrades are all possible capital improvements.
This can include storm windows/doors, new roof, new siding, or a satellite dish.
This includes attic, walls, floors, pipes and duct work.
Built-in appliances, kitchen modernization, flooring, wall-to-wall carpeting, and fireplace updates can be included.
Can't Include as a Capital Improvement
Any costs of repairs or maintenance that are necessary to keep your home in good condition but don’t add to its value or prolong its life. Examples include painting (interior or exterior), fixing leaks, filling holes or cracks, or replacing broken hardware.
Any costs of any improvements that are no longer part of your home (for example, wall-to-wall carpeting that you installed but later replaced).
Any costs of any improvements with a life expectancy, when installed, of less than 1 year are not considered home improvements.
Next time you embark on a home improvement project, be sure to contact your accountant. They can give you additional research and guidance on what paperwork to keep up with during your project.
Chris is a Strategic Analyst who maintains expertise in litigation support, international taxation, and complex entity and fiduciary taxation services.