Tax Credit: Deduction Tips for Home Improvement
With the new year under way, you may be thinking about needed home improvements and how you’ll use your credit to fund them. While it’s important to understand your credit before making major home improvement decisions, you should also consider another kind of credit — tax credits for energy-efficient home improvements.
For the past few years, the federal government has offered tax credits for certain home improvements aimed at increasing a home’s energy efficiency. While the most popular and generous tax credits, such as the one that allowed you to claim up to 30 percent of improvements such as a new roof or hot water heater, have expired, you can still get credit for other significant energy-efficient improvements.
According to EnergyStar.gov, you can claim a tax credit for 30 percent of the cost of installing a geothermal heat pump, small wind turbine or solar energy system in your home. The credit has no upper limit and applies to both existing homes and new construction, but not to rental properties. This credit is good until Dec. 31, 2016.
You can also get a credit of up to 30 percent of the cost of residential fuel cells, up to $500 per .5kW of power capacity, EnergyStar.gov says. This credit is also available until Dec. 31, 2016.
While the initial cost of these improvements may seem significant, they can dramatically decrease home energy bills in the long run.
Depending on the type of home improvement or repair you undertake, you may also be able to claim a deduction on your taxes. Before launching a significant home repair or improvement, it may pay to consult with your tax accountant to see what, if any, portion of the cost may be deductible. And, as you do home repairs throughout the year, keep receipts and discuss the improvements and possible deductions with your accountant when he or she is preparing your tax return.
Knowing ahead of time which, if any, tax credits or deductions your home improvement may qualify for can help you make a better decision about how to use credit to fund the work. Since how you use credit affects your overall credit score, knowing the cost of a project before starting it can help you better manage your credit.
If you’re unsure how a home improvement project may affect your credit score, websites like freecreditscore.com can help you understand it. The site offers members a Credit Score Estimator that can help you understand how big financial decisions, like applying for a home improvement loan, may affect your credit score.
To learn more about tax credits for energy-efficient home improvements, visit www.EnergyStar.gov. To learn more about tax deductions, visit www.IRS.gov. You can find a list of regional tax credits, rebates and savings at energy.gov/savings.