Own Your Home? Don't Forget These Tax Breaks
For many Americans, owning a home is a large investment –- in money, in time and in a community. Fortunately, those investments can pay off at tax time, with several deductions that can help minimize the burden. Many homeowners are familiar with the home mortgage interest deduction, but a few others might be lesser known, although no less important, when it comes to saving on your return.
For many people, the decision to retire in their own home or move to an assisted living community can be a difficult one, with dramatic financial and emotional implications. For those who opt to stay in place, however, the Internal Revenue Service offers some relief.
If a homeowner makes renovations or improvements based on a doctor's recommendations, such as adding a lap pool for water therapy, leveling a driveway or installing a ramp or other accessibility equipment, some costs can be deducted as medical care. The amount of the deduction will be determined by how much value the improvement added to your overall home. If it hasn't added any value, and the improvement is strictly for medical purposes, the entire cost can be counted as a medical expense.
"If a doctor says you need to make your home more accessible, and if that's a motivation to do some improvements, most people think those large capital expenditures need to be depreciated," says Curtis Erickson, a certified public accountant in Seattle. "But the IRS has an exception that these can qualify as actual medical expenses if you make the investment all in one year."
More information on medical-related home improvements can be found in Publication 502, Medical and Dental Expenses, on Page 6 under "capital expenses."
Opting to move instead? Folks who have been in their homes for decades may have seen its value skyrocket. That sounds like great news, but they'll be in for a rude awakening when it comes time to pay taxes on those gains.
Jackie Perlman, principal tax research analyst at The Tax Institute, says the costs of home improvements and renovations over the years can help offset the taxes on the gain.
"If you bought a home a long time ago and didn't spend all that much for it, you may be in for a shock when it comes to pay taxes on the sale," Perlman says. "But if three years ago, you completely remodeled your kitchen, you've just increased your basis from $80,000 to $120,000, and that can be a big tax boost to you when you sell that home years later. And every penny counts. Especially in areas with expensive homes, you might have more gain."
Perlman advises homeowners to keep all the paperwork while improvements and renovations are done, since it will come in handy at tax time.
More information on declaring gains from home sales can be found in Topic 701 and Publication 523.
Installing alternative energy features in your home can cut your energy bill -- and your tax bill. The IRS gives residential energy-efficient property credits for solar electric, solar water heating, wind energy, geothermal heat pumps and other qualified energy-efficient home improvements, which can include labor costs in most cases.
Not all energy-efficient upgrades qualify, so before buying and installing any new features, check with the manufacturer. It should provide a tax credit certification either on its website or the product packaging. If you're on the fence about making these improvements to your home, act fast. The credit only runs through 2016. They can be declared using Form 5695: Residential Energy Credits.
Home Office Deduction
Work from home on a regular basis? Use your garage for storing work-related supplies? If you fall within certain parameters, you may be able to take the home office deduction. U.S. News looked into demystifying the home office deduction earlier in the tax season, but here's the gist:
If a portion of your home is your primary workplace, you regularly meet with clients and/or you store work-related supplies, you may qualify for the home office deduction. Jeff Porter, a certified public accountant and principal of Porter & Associates in West Virginia, warns not to rent out your spare room on Airbnband claim the deduction, since the space must be used exclusively for work.
More information about the home office deduction can be found in Publication 587.
As an incentive to increase the building of new, low-income housing or rehabbing existing rental properties for underserved communities, the government offers a low-income housing tax credit. The credit is designed to help bridge the gap between the costs of the project and the developer's (and investors') return on investment. Owners of low-income housing rental units are also eligible for credits. Additionally, the IRS offers the mortgage interest credit, which helps lower-income individuals afford a home.
The IRS provides a full guide to tax information for homeowners, including a guide to what can and can't be deducted, and where to get help.