When economists write about taxes, they rarely use the word, choosing instead to refer to taxes as incentives. The idea, of course, is that government policy can be most effectively implemented if government gives citizens an incentive to do what the government thinks is right.
The best current example (although who knows how long it will last) are incentives that will cut energy use in homes (solar panels on the roof) and in cars (electric or hybrid cars that use less hydrocarbon fuel) and emit less of the carbon that contributes to rising global temperatures.
There are also incentives for homeowners who make certain other types of improvements. Audrey Ference at Realtor.com presents a list of improvements that can save homeowners some real cash.
If you replace an old furnace, for example, with a qualifying energy-efficient model, you are eligible to deduct up to $200 from your federal tax payment. There's a lifetime cap of $500 for this deduction, and to qualify the system must have been purchased in 2016 for your main residence. Here are a few other items that qualify:
- $300 for a qualifying biomass stove
- $300 for qualifying air-source heat pumps
- $300 for qualifying central AC systems
- $300 on qualifying water heaters
This includes things like solar panels, solar water heaters, fuel cell systems, wind turbines and geothermal heat pumps. The tax deduction for these improvements is 30% of the project's cost, and there is no upper limit. Improvements to both your main residence and any vacation home are allowed, but you have to move reasonably quickly. The tax credit expires in 2019, unless Congress and the president renew it.
Medically Necessary Modifications
Adding a ramp or modifying doors and stairways to accommodate medical requirements are among the improvements you can make that are eligible for a tax deduction. There are limits however. The modification must be medically necessary and cannot increase the value of your home. For example, if the doctor says you need more exercise and you put in new swimming pool, the deduction won't be allowed. In addition, the total cost must exceed 10% of adjusted gross income (7.5% for people over 65). The full amount of the modification is deductible.
Adding a room or remodeling a kitchen is not deductible, but the change in the basis of your home's value can be valuable when you decide to sell the home. If your basis price rises, it helps offset the appreciated value of your home and could reduce any capital gains tax you might have to pay on the sale.
Interest on Home-Improvement Loans
Interest on a home improvement loan or home-equity line of credit (HELOC) is deductible if you use the money for renovation. The deduction limit is $100,000 and any kind of home improvement is eligible.