Are home improvements tax deductible? Not all of them, but some energy-saving home improvements can earn you tax credits. Tax credits directly lower the amount of tax you owe and can increase your tax refund (if you’re due one).
For example, installing energy-efficient windows can earn you up to a $200 tax credit in 2021. If you earn the entire $200 tax credit, you’ll pay $200 less in taxes. If you’re due a refund, you’ll typically get $200 more when you claim the tax credit.
Energy-saving tax credits currently offered by the IRS are called Residential Energy Property Tax Credits. These credits are valid for qualifying improvements completed before December 31, 2021. Congress often extends these tax credits when they expire, so you may still be able to get tax credits for qualifying home improvements in 2022 and beyond. Because there’s no guarantee that the current tax credits will be extended, check with the IRS, your tax advisor or a home improvement consultant about these tax credits when planning home improvements.
The IRS has specific rules and limitations for claiming Residential Energy Property Tax Credits for home improvements.
You’re limited to a lifetime overall tax credit limit of $500 for all qualifying home improvements. Also, qualifying improvements must be made to your primary residence.
For purposes of taking the credit, you can rely on the manufacturer’s certification in writing that a product is qualifies for the credit. Your home improvement consultant can typically guide you to products that qualify for tax credits.
You can claim Residential Energy Property Tax Credits for 2 types of home improvements—energy efficiency improvements and energy property expenditures. Tax credits for these improvement types differ.
Here are details about the 2 different types of energy-saving home improvements.
Qualified Energy Efficiency Improvements
You may claim a tax credit for 10% of the cost* of these qualified energy efficiency improvements:
Energy-efficient exterior windows and skylights (subject to a $200 lifetime tax credit limit).
Roofs (metal and asphalt) and roof products.
Insulation that is specifically and primarily designed to reduce heat loss or gain of a home.
Residential Energy Property Expenditures
You may claim a tax credit for the cost* of replacing or installing:
Energy-efficient heating and air conditioning systems.
Qualifying water heaters (natural gas, propane or oil).
Qualifying biomass stoves.
Advanced main air circulating fan for a natural gas, propane or oil furnace ($50 limit).
Qualified natural gas, propane, or oil furnace ($150 limit)
Qualified natural gas, propane or oil hot water boiler ($150 limit).
Form 5696 is where you can claim these credits on your tax return. The IRS instructions for Part II of Form 5696 provide rules and guidelines for claiming energy-saving home improvement credits. Your tax advisor can also provide you with more information and guidance regarding these tax credits. Also, online tax preparation software guides you through the process for claiming these credits.
Knowing about tax credits for home improvements can help you make informed decisions when you replace windows, roofing or HVAC systems.
*Tax credits are limited to a combined lifetime maximum of $500. The lifetime tax credit limit for windows is $200.
Other Common Questions About Home Improvement
What Type of Renovation Is Tax Deductible?
Energy-saving renovations that qualify for Residential Energy Property Tax Credits described above can lower your taxes.
Other renovations aren’t tax deductible on yearly taxes unless they are specifically for medical purposes. Adding wheel chair ramps, modifying bathrooms, and other renovations for medical purposes can sometimes be deducted from taxable income.
Renovations can help reduce capital gains taxes when you sell your home. Home improvements typically increase the cost basis of your home, so you’ll realize a smaller capital gain when selling.
What Improvement Adds the Most Value?
Adding stone veneer to the front of your home boosts curb appeal and adds the most value to your home according to Remodeling magazine’s 2020 Cost vs. Value Report. You’ll typically recoup 96% of your investment through increased home value with that home improvement.
Garage door replacement is another improvement that enhances curb appeal and home value. It runs a close second to adding stone veneer for adding the most value to your home. Expect to recoup 95% of your investment when replacing your garage door.
Remodeling your kitchen is a third option that typically adds the most value to your home. According to Remodeling magazine, you can expect to recover about 78% of the cost of a kitchen remodel through increased home value.
Where Should Renovation Begin?
Successful renovation starts with good planning. Build a detailed plan and set a budget for your remodel. Figure out where you want to start your renovation. Typically the kitchen is the first space you’ll want to renovate because the work is often extensive and messy.
Next, search for a contractor to complete your remodel. Check online ratings to find reputable contractors. Use online resources to find out what questions to ask contractors. Get at least 3 bids from contractors before you decide who to use.
Beginning your renovation with thorough research and planning will help your remodel go smoother.
What Improvements Can Get an Insurance Discount?
Installing a new roof can typically get you the biggest insurance discount. You can likely lower your insurance premiums even more in storm- and hurricane-prone areas by using roofing materials resistance to wind and hail damage.
Installing impact-resistance windows in hurricane-prone areas can also get you an insurance discount.
Check with your insurance provider regarding discounts for these home improvement discounts and any other discounts that you may be able to get when renovating your home.