Tax breaks can be one of the most exciting phrases you hear during tax season. Anything that can decrease the amount of taxes you owe means more money in your pocket! So, finding tax credits can feel like Christmas in April.
While many homeowners know about the deductions they can take as a homeowner, many don’t know about the tax credits that arise from a home addition or whole-home renovation. If you have completed a home addition project or are thinking about doing one, take note of how your project will positively affect your taxable income.
Tax Credits vs. Deductions
There are two forms of tax breaks affecting the overall amount you pay in taxes. While deductions and credits are similar, they are different. Tax deductions reduce your overall taxable income, while tax credits are a dollar for dollar subtraction of the taxes themselves, meaning if you have $10,000 in taxes with a credit of $1,000, your taxes will only amount to $9,000.
Here are a few credits and deductions to pay attention to when it comes to a whole-home renovation.
Improvement Loan Deduction
It takes a significant amount of money to complete a home addition or a whole-home renovation. If you are financing your new home addition, the exciting news is that the IRS will treat your new loan the same as your mortgage. You, therefore, get to write off all interest payments made on the new loan come tax season. You must itemize your return to claim this deduction.
Energy Efficiency Tax Credit
Energy-efficient materials are becoming a more popular option for home renovations and additions. They can also produce deductions for your taxes. Tax credits are given for solar panels, solar water heaters, wind turbines, and a variety of other items to help offset the cost of these energy-saving upgrades. The IRS offers tax credits on energy-efficient products and their installation.
Property Tax Deduction
Home improvements typically mean an increase in the value of a property. This may mean an increase in your annual property taxes as well. While no one likes to see their property taxes rise, these taxes are deductible on your federal tax return. Just make sure that you are writing off property tax only. Oftentimes, there are miscellaneous charges that look like a portion of your property tax but are not. They are therefore not tax-deductible.
Medical Deduction
Most adjustments made to your home for medical purposes are deductible. Adding ramps or adjusting the width of doors and hallways to make a home wheelchair accessible can be written off as a medical deduction. Grab bars and adjustments to counter height are other renovations that can save you money. However, any renovation made for aesthetic purposes is not deductible.
In order to get the medical renovation deductions, you must itemize your tax return. There is also an AGI threshold on these deductions, meaning you cannot deduct the full cost of these adjustments, only the amount that exceeds your adjustable gross income.
Home Expenses and Improvement Write-Offs
While you can’t simply write off improvement costs on your tax return, they can still help save you on taxes down the road. Profits made on the sale of a home can be considered taxable income. If you track the expenses in improvements made to the property during your homeownership, you can decrease the taxable amount during resale.
Tax Credit Tips
Whole-home renovations can be costly ventures, so you want to maximize as many savings as you possibly can. As you make improvements to your home, keep track of all invoices and receipts of the home renovation projects. How much did materials cost? How much did labor cost? These factors can play a large role in the amount of money you can deduct or you will receive as a credit.
But make sure to check with your personal tax representative about your particular home and projects. He or she can best determine what counts as deductions and credits come tax season.
A well-designed home addition adds great value to your life by providing space and function to your family and increasing your property value. Knowing the tax benefits you can receive from your renovation only helps to make it a worthwhile investment. Schedule a consultation with our Action Builders team to get design ideas best suited for your family and home.