The IRS has strict regulations on what a homeowner can and cannot deduct on annual income taxes. While real estate property taxes, home mortgage interest and mortgage insurance premiums lie on the “can” side of the tax deduction equation, the majority of home improvements don't. However, there are ways to reduce a tax bill indirectly. Although none are home improvement tax deductions in the strictest sense of the term, all produce a similar effect.
Energy Tax Credits
Installing energy efficient features in your home can qualify you to take a one-time federal tax credit. You should understand, however, that tax credits are not the same as tax deductions. While tax deductions reduce taxable income, tax credits come after determining a tax bill and directly reduce the tax liability. Through Dec. 31, 2013, qualifying biomass stoves, insulation, roofing, non-solar water heaters, energy efficient windows and doors, and heating, ventilating and air conditioning systems are eligible for a tax credit of 10 percent of cost up to $500 or a specific amount from $50 to $300. In addition, geothermal heat pumps, residential wind turbines and solar energy systems are eligible for a tax credit of 30 percent of the cost through Dec. 31, 2016. Residential fuel cells and microturbine systems are eligible for a tax credit of up to 30 percent of the cost, up to $500 per 0.5 kilowatt of power capacity, also through Dec. 31, 2016.
Medical Expense Deductions
The IRS will allow a homeowner to deduct the cost of home improvements that are medically necessary or necessary to accommodate a disabled person. The full cost of improvements -- such as lowering kitchen cabinets, making bathroom modifications, installing ramps and widening doorways, and adding porch lifts and handrails -- can be included as a medical expense because the IRS does not consider these to add value to the home. If an improvement does increase the value of the home, however, the homeowner must deduct the increase in value from the cost of the improvement. The difference is the amount the homeowner can deduct.
Home Equity Loan Deductions
Mortgage interest on a home equity loan is deductible as long as you use the money according to IRS regulations. This means the money must go towards “substantial” improvements rather than repairs to simply maintain the home. IRS guidelines define “substantial” improvements as improvements that add value, extend the homes’ useful life or adapt the home to new uses. Mortgage points paid on a home equity loan can sometimes qualify for deduction. However, the home must meet six qualifying criteria, the deduction must be taken in the year the points are paid, and the money must be used only to improve the home.
State and Local Options
To find out about state and local tax deductions, visit the Energy.gov website. Select a state and from the “Eligibility” dropdown box, then select “Residential.” Results will display every savings option available to residential homeowners who live either in the state or a specific county within the state for a variety of home improvements. Among the most common are heating and cooling improvements, weatherization projects, sealing the home, adding bioenergy options such as a wood-burning stove, and adding energy efficient windows, doors and skylights.
Based in Green Bay, Wisc., Jackie Lohrey has been writing professionally since 2009. In addition to writing web content and training manuals for small business clients and nonprofit organizations, including ERA Realtors and the Bay Area Humane Society, Lohrey also works as a finance data analyst for a global business outsourcing company.