Can Home Improvements Lower Your Tax Bill? It Depends

Most home improvements are not tax deductible — with one possible exception. In certain situations, you may be able to deduct improvements deemed necessary for medical reasons (not just beneficial to general health). If you itemize instead of taking the standard deduction, you can deduct unreimbursed medical expenses that exceed 7.5% of your adjusted gross income, so the tax savings could be significant if a costly home improvement pushes your total medical expenses above that threshold. Installing air conditioning to help treat asthma or modifying a home to make it wheelchair accessible are common examples of qualifying expenses.

Here are two more ways that improving your home could potentially reduce your tax burden.

Capital improvements

Projects that add to the value of your home, prolong its life, or adapt it to new uses are considered capital improvements. When you sell your home in the future, you can add the cost of capital improvements to your initial basis (what you paid for it originally), reducing your capital gain and the resulting tax bill.

Some examples of capital improvements include remodeling the kitchen, replacing all your home’s windows, adding a bathroom, or installing a new roof. Repairs that keep your home in good condition (such as repainting, replacing a broken door or window, or fixing a leak) don’t count as capital improvements. However, an entire repair job may be considered an improvement if it’s done as part of an extensive remodel or restoration.

Energy-saving tax credits

The Inflation Reduction Act of 2022 reconfigured two nonrefundable tax credits for home improvements that save energy. Unlike a deduction, which reduces your taxable income, a tax credit lowers your tax bill dollar for dollar. Both credits are available only for the installation of new products that meet specific energy efficiency requirements.

The energy efficient home improvement credit is equal to 30% of qualified expenditures for an existing home (not new construction). A $3,200 maximum annual credit is available through 2032. A $2,000 limit (30% of all costs, including labor) applies to electric or natural gas heat pumps, heat pump water heaters, and biomass stoves and boilers. A separate $1,200 limit applies to home energy audits and building envelope components (such as exterior doors, windows, skylights, and insulation) and energy property (including central air conditioners).

The residential clean energy property credit is a 30% tax credit available for qualifying expenditures for clean energy property (and related labor costs) such as solar panels, solar water heaters, geothermal heat pumps, wind turbines, fuel cells, and battery storage.

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For retirees investing in bonds, don’t assume that individual bonds and bond funds are the same type of investment. Bond funds do not offer the two key characteristics offered by bonds: (1) income from bond funds is not fixed–dividends change depending on the bonds the funds has bought and sold as well as the prevailing interest rate, and (2) a bond fund does not have an obligation to return principal to you when bonds within the fund mature. Additionally, the risk associated with bond funds varies depending on the bonds held within the fund at any given time, whereas the risk associated with individual bonds generally decreases over time as a bond nears its maturity date (assuming the issuer’s financial situation doesn’t deteriorate). Finally, fees and charges associated with bond funds reduce returns. Even so, you may still find bond funds attractive because of their convenience. Just be sure you understand the differences between bond funds and individual bonds before you invest.

This content has been reviewed by FINRA.

Prepared by Broadridge Advisor Solutions. © 2024 Broadridge Financial Services, Inc. 

Investment and insurance products and services are offered through Osaic Institutions, Inc., Member FINRA/SIPC. F&M Financial Services is a trade name of F&M Bank. Osaic Institutions and F&M Bank are not affiliated.

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