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Save Tax On Home Improvements

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Are you planning to make some improvements around the home? The time is ripe from a tax perspective.


Strategy: Keep the current tax rules in mind. As long as you follow certain guidelines, you can defray the cost by hundreds or even thousands of tax dollars.


Here are three ways you can realize tax benefits for home improvements.


1.      Energize your home. The popular residential energy credit, which covers costs ranging from central AC to insulation, expired after 2017, although Congress could extend it again. But you can still claim the “residential energy efficient property credit” for qualified solar, wind, geothermal and fuel-cell technology expenses.


The list of qualified expenses 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.

• Fuel cells relying on a renewable resource, such as hydrogen, to generate power for the home.


For 2019, the credit equals 30% of the cost of qualifying equipment in - stalled in your home. Plus, there are no dollar limits on qualifying expenditures. Tip: Act soon. The alternative credit will start to be phased out after this year and it disappears completely after 2021.


2.      Convert a home equity debt.


Prior to the Tax Cuts and Jobs Act (TCJA), 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—such as a vacation home—up to certain 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. Previously, 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 cuts 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.


Fortunately, however, you 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. Reason: It is 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.


Tip: You still must stay within the $750,000 limit acquisition debt.


3.      Obtain the tax prescription. The TCJA reduced the threshold for deducting medical expenses from 10% of adjusted gross income (AGI) to 7.5% of AGI, but only for 2017 and 2018. Now the threshold has reverted to 10% of AGI. 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 prescribed by a physician.


For example, if you install a pool or hot tub in your backyard to treat your arthritis, you may add part of the cost to your medical expenses for the year. 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.


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. But there might not be any increase. For example, putting in a pool may not add to the value of your home.


Tip: Obtain a written appraisal from an independent real estate expert on the increased value due to the home improvement.

Janice Batchelor