4 Home Improvements That Can Lower (or Eliminate) Your Tax Bill

4 Home Improvements That Can Lower (or Eliminate) Your Tax Bill

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We know. It’s tax season and you’re knee-deep in paperwork and you already dipped into your savings to remodel your home last year and now you have to pay more money to the IRS and you just want it all to end already.

Wait, back the truck up. Did you say you remodeled your home? You might be in luck. If you’ve made the right kind of renovations, you could deduct the expense or even get a tax credit—which promises to lower the amount you owe to the IRS. And if you’re planning to renovate—or even to buy a home that could require renovations—you’d do well to approach it so you can reap these rewards, too.

Here are four big renovations that can lower your tax bill.

Energy generators

Under the Residential Energy Efficient Property Credit, homeowners can receive a tax credit for alternative energy equipment installed in your home.

(Yes, that’s a tax credit, which is directly subtracted from the amount you owe, as opposed to a deduction, which simply lowers your taxable income.)

Homeowners receive credit for up to 26% of the cost of “alternative energy equipment,” defined by the IRS as solar electric systems, solar water heaters, wind turbines, or geothermal heat pumps purchasing and installing after December 31, 2019, and before January 1, 2021. You can also receive credits for residential fuel cells, capped at $500 per one-half kilowatt of energy capacity.

Granted, these are all expensive additions—a wind turbine capable of powering your entire property costs $30,000 on average—but they pay back come tax time.

Home improvements paid for by your mortgage

Here’s a sneaky trick to get a small tax benefit from home improvements that might not otherwise be deductible: Make renovations immediately after purchase and take out a larger mortgage to cover the added expense.

Keep in mind that the mortgage interest deduction is an itemized deduction and you can deduct only up to the $750,000 cap. This means all of your itemized deductions need to be greater than the new standard deduction, which the 2018 Tax Cuts and Jobs Act nearly doubled.

And note that those amounts just increased for the 2020 tax year. For individuals, the deduction is now $12,400, and it’s $24,800 for married couples filing jointly, plus $1,300 for each spouse aged 65 or older. The deduction also went up to $18,650 for head of household.

Taking out a bigger mortgage may not be a huge advantage. But if you would need to borrow money to afford renovations anyway, this allows you to potentially save some of that cash on your tax return.

Medical necessities

If you are or a family member is disabled or affected by a serious illness, medically necessary home improvements can be deducted from your income.

There’s a wide variety of potential tax savings, depending on your condition and which improvements you make, but some common expenses are installing a wheelchair ramp, widening doorways, lowering the cabinets, and grading the ground to provide easier access.

These home improvements will need to exceed 7.5% of your adjusted gross income. So if you make $60,000, this deduction kicks in only on money spent over $4,500. But major home improvements are a great opportunity to meet that milestone—just remember that you’ll need a letter from your doctor to prove these changes were medically necessary.

Energy-efficient additions

Coughing up tens of thousands of dollars for high-cost energy additions such as solar water heaters and heat pumps isn’t the only way to take advantage of Uncle Sam’s green tax credit. You can do simple improvements, too: Swapping in energy-efficient doors, windows, or skylights for up to a $500 deduction.

Keep in mind the percentage of the credit ends entirely after 2021.

“The energy property credits are some of the best,” says Crystal Stranger, the tax operations director at 1st Tax Services. Unlike energy generator credits or medically required alterations, it is easy for most homeowners to qualify for several credits after a normal year’s worth of improvements—without spending a ton of money.

Just make sure you pay close attention to the qualifications. New additions must be Energy Star–rated and installed in your principal residence, meaning rental improvements are, unfortunately, beneficial only to the world and not your tax bill.

This tax credit is as good a reason as any to actively seek out energy-efficient changes whenever you’re making improvements to your house. Choosing to pay slightly more for an Energy Star window can end up cheaper in the long run due to the money you’ll save on utility bills—and all you have to do is ask.

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