Home Improvements and Other Deductions May Lower Homeowners’ Tax Bills

It’s time to start getting your tax information in order. Thankfully, there are a few obscure deductions homeowners should know about, but claiming them can be tricky.

It Starts at Home

Home improvements are not tax deductible, however, as this is the IRS, there are exceptions of which homeowners should be aware.

In the eyes of New York State, a home repair, i.e., a modification that restores a home to its original state, is not tax deductible. However, improvements that increase a home’s value, such as adding siding, may be deductible. To make sure you do not run afoul of any laws it is heartily recommended to consult with a tax professional. Similarly, everyone’s “tax situation” is unique and how one files often depends on the type of renovations made and how well expenses have been documented.

Routine repairs — those that solve a problem but do not add value such as repairing a leak — are usually not tax-deductible. Federally speaking, however, under certain circumstances, specific improvements deemed necessary for medical reasons may be deductible.

“Taking such deductions are generally OK,” said Brian Centner, a CPA in Bridgehampton, “but there must be a legitimate medical reason behind doing so. There are limits.”

The IRS allows deductions for home improvements/modifications that are medically necessary for the wellbeing of the taxpayer and can include the following:

• Installing ramps or lifts
• Widening doorways to accommodate wheelchairs
• Modifying bathrooms for accessibility
• Lowering cabinets and other fixtures for accessibility
• Adding handrails and grab bars

“To qualify for a deduction, the primary purpose of the improvements must be to provide medical care to the taxpayer, their spouse or dependents. Taxpayers may not be aware of the range of deductions that qualify as a medical deduction, per IRS guidance,” said Ella Savy, the tax director at CBIZ in Bridgehampton. “Generally, most taxpayers know about common medical deductions, such as doctor’s visits, medications, but fewer are aware of credits related to home improvements that are needed for medical reasons. This may come up in the annual planning meeting.”

Those that can be characterized as beneficial for general health, perhaps a sauna or home gym, typically are not. If you itemize instead of taking the standard deduction, you can deduct unreimbursed medical expenses that exceed 7.5 percent of your adjusted gross income. This tax savings can be substantial should an expensive home improvement elevate one’s total medical expenses above the threshold. Something like installing air conditioning for a family member suffering from asthma or modifying a home to make it wheelchair accessible are typical examples of qualifying expenses.

“Some people are reluctant to take the home office deduction,” says Centner. “As long as the claim is legitimate and reasonable you typically do not have anything to worry about. It’s those who are unreasonable who need to be concerned.”

Similarly, projects that add to the value of your home, prolong its life, or adapt it to new uses, such as adding heat pumps, are generally considered capital improvements. Should the home be sold at a later date, the owner can add the cost of capital improvements to their initial basis (the price paid for the home). This can reduce your capital gain and potentially the amount of tax due.

“Adding solar is getting popular,” Centner added. “The taxpayer needs to keep good records including invoices, receipts etc., or the return may be flagged.”

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

“The most common credit the taxpayer knows is the credit associated with the installation of the solar panels,” Savy said. “It is also the easiest, in my opinion, because of the availability and advertising, many providers offer financing options, installation is straightforward and does not require major changes to the structure of the home. Another credit that many people may not be aware of is installation of solar water heaters. These are widely available, relatively simple to install and qualify up to 30 percent of the cost for a credit.”

Save Energy – Save Money

The Inflation Reduction Act of 2022 reconfigured two nonrefundable tax credits for home improvements that save energy. Unlike a deduction, which reduces taxable income, a tax credit lowers a 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 percent 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 percent 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 i.e., central air conditioners.

The residential clean energy property credit is a 30 percent 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 for an existing or newly constructed home. The credit shrinks to 26 percent for property placed in service in 2033, 22 percent in 2034, and is eliminated thereafter.

In New York State, there’s a credit for replacing or installing a residential fuel oil storage tank as well as for purchasing and installing a solar or wind energy system at your principal residence. The credit is equal to 25 percent of qualified solar energy system equipment expenditures and is limited to $5,000. The solar energy system equipment credit is not refundable. However, any credit amount in excess of the tax due can be carried over for up to five years. See Form IT-255.

Volunteer firefighters and ambulance workers may be eligible for a credit if, for all of the tax year, they were an active volunteers and a New York State resident. The credit amount is $200 ($400 for married filing joint taxpayers where both spouses are eligible). You cannot, however, claim this credit if you receive a real property tax exemption that relates to your volunteer service. However, if the property has multiple owners, the owner whose volunteer service was not the basis of the exemption may be eligible to claim the credit. Check form IT-245.

There’s a new movement in Washington to permanently remove the controversial cap on the State and Local Tax deduction, known as SALT. Imposed by the Tax Cuts and Jobs Act of 2017, the cap imposes a $10,000 limit on federal deductions for state and local taxes paid, including income and property taxes.

The SALT cap expires this year and word is that a tax bill will be formulated in early April — stay tuned. Presently this means the future of the SALT deduction limitation is uncertain.

“We stand firmly in support of measures that would incentivize homeownership,” said Marlo Paventi, the senior director of public policy and government affairs at the Long Island Board of Realtors. “One of those proposals would be a substantial increase in the state and local tax (SALT) deduction limit. By alleviating some of the financial burdens on homebuyers, we can help make the dream of homeownership more attainable.”