You may still be able to realize generous tax benefits for home improvements – despite some changes that were enacted as part of the Tax Cuts and Jobs Act. If you’re planning to make renovations to your homer and you meet certain requirements, you can claim deductions or a credit. Here are the basic rules
Are you planning to make substantial renovations to your home? You may be adding a deck or patio, finishing a basement or attic or installing a pool. Despite some changes in the Tax Cuts and Jobs Act (TCJA) that may discourage homeowners, you can still realize generous tax benefits for home improvements.
Here are three ways.
- Claim a residential renewable energy tax credit. The popular nonbusiness energy property tax credit, which covered costs such as central AC, windows and energy-efficient furnaces, expired after 2017. (It might be extended again by Congress.) But you can still claim the “residential renewable energy credit” for qualified solar, wind, geothermal and fuel-cell technology expenses.
The list of equipment qualifying for this credit includes:
- Solar panels or photovoltaics for generating electricity;
- Solar-powered water heaters;
- Wind turbines generating up to 100 kilowatts of electricity for residential use;
- Geothermal heat pumps meeting federal Energy Star guidelines; and
- Fuel cells relying on a renewable resource, such as hydrogen, to generate power for the home.
For 2019, the renewable energy credit is equal to 30% of the cost of alternative energy equipment installed in your home, as opposed to just 10% for the regular residential energy credit. Plus, there are no dollar limits on any items as there were with the regular residential credit.
However, the alternative credit is being gradually phased out after this year. It is scheduled to drop to 26% in 2020 and then 22% in 2021 before it disappears completely, unless Congress also renews this credit. Bottom line: Make qualified installations in 2019 to receive the full tax benefit of the credit.
- Qualify to deduct home equity loan amounts. Under prior law, you could generally deduct mortgage interest paid during the year for both “acquisition debt” and “home equity debt” on your principal residence and one other home (for example, a vacation home), up to specified levels.
- Acquisition debt is defined as a debt incurred to buy, build or substantially improve a qualified home. Prior to the TCJA, mortgage interest paid on the first $1 million of acquisition debt was fully deductible.
- Home equity debt is any other qualified debt such as a home equity loan or home equity line of credit. Before the TCJA, you could deduct mortgage interest paid on the first $100,000 of qualified home equity debt, regardless of how the proceeds were used.
But the TCJA lowers the threshold for acquisition debt from $1 million to $750,000 for 2018 through 2025. (Debts incurred before December 16, 2017 are grandfathered.) Also, the new law suspends the deduction for home equity debt until 2026.
Finally, the TCJA also eliminates or limits certain other itemized deductions, while effectively doubling the standard deduction. As a result, fewer taxpayers expect to itemize the next few years.
Fortunately, however, homeowners can squeeze through a tax loophole. If you incur a new home equity loan or line of credit and use the proceeds for home improvements, the debt is treated as acquisition debt, instead of home equity debt. The reason? It’s a debt being incurred to “substantially improve” a qualified residence. So you can add this mortgage interest to your deductible total if you itemize deductions.
In other words, you’re converting a nondeductible home equity debt into a deductible acquisition debt. This will increase your mortgage interest deduction as long you stay under the current threshold.
- Claim medical deductions for qualified medically necessary home improvements. The TCJA reduced the threshold for deducting medical expenses from 10% of adjusted to gross income (AGI) to 7.5% of AGI, but only for 2017 and 2018. For 2019 and later years, the threshold reverts to the 10%-of-AGI mark.
Nevertheless, you may still qualify for a deduction if you have substantial medical expenses in a particular tax year. This might include the cost of medically necessary home improvements.
To be deductible, a medical expense must be incurred primarily for the prevention or alleviation of a physical or mental defect or illness. For example, if you install an in-ground pool or a hot tub in your backyard to treat your arthritis, you may be able to add part of the cost to your medical expenses for the year.
For these purposes, the deductible amount of the home improvement equals the cost exceeding the resulting increase in the home’s value if you own the home. Improvements made by tenants are fully deductible, subject to the usual annual threshold.
Some other common examples of home improvements that may be deductible as medical expenses are air conditioning installed to alleviate a child’s asthma, an elevator built for an adult with a heart condition and special modifications for a disabled person.
You should obtain a statement from a physician prescribing a home improvement needed to alleviate a medical condition. Also, retain a written appraisal from an independent real estate expert establishing the increase in your home’s value due to the home improvement.
These are just the basic rules for the three tax breaks available for making home improvements. Consult with your tax advisor about your situation.
Our firm provides the information in this e-newsletter for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided “as is,” with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.
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