Top Tax Deductions For Going Green in Your Home

It may have been your dream house when you bought it, but most homeowners soon come up with a long list of ways to improve it. Fortunately, the Internal Revenue Service often offers assistance to homeowners remodeling, renovating and otherwise improving their homes. A collection of tax incentives for homeowners to make energy-efficient improvements took effect in 2006. The best thing about these tax breaks is that they are credits, which reduce IRS bills dollar for dollar. And while some credits are phased out once a taxpayer earns a certain amount, these credits are available to any homeowner, regardless of income.

Energy Improvements

The Energy Tax Incentives Act of 2005 established a 10% tax credit with a lifetime cap of $500 for conventional technology home improvements. The credit is based on the cost of new energy-efficient improvements including insulation, exterior windows, exterior doors, water heaters, heat pumps, central air conditioners, furnaces and hot water boilers. Within each conventional energy-saving category, the specific credit amounts also are limited. And the $500 cap applies to total energy upgrades made in both 2006 and 2007, not separately for each year. So if you claimed the maximum $500 worth of eligible energy improvements in 2006, you get none in 2007.

Solar Tax Savings: Homeowners who opt for the more expensive solar renovations can claim up to $2,000 in credits each year. Qualifying home improvements that count toward that annual amount include solar water-heating systems, solar equipment that generates photovoltaic electricity for the home and fuel-cell power systems. The IRS has issued official guidance on the residential tax credits, and official EnergyStar.gov has transferred those details to a helpful chart.

Medical Renovations

You can then deduct these amounts as long as you follow your doctor's orders and the IRS's rules. If you need, for example, to add a chair lift to get up and down the stairs, the IRS generally considers that a legitimate expense. Other deductible projects that make a house more accessible for a handicapped resident or individual with chronic medical problems are deductible improvements for handicapped access: Adding ramps, Widening doors and hallways, Lowering counters and cabinets, Adjusting electrical outlets and fixtures, Installing railings, support bars and other bathroom modifications, Changing hardware on doors, and Grading exterior landscape to ease access to the house.

Partial Medical Deductions & Documentation Demands

If you do make changes to your home that adds to the property's value, you might still get some tax savings. For example: A person suffering from cystic fibrosis is told by physicians to maintain a constant temperature and high humidity in the home. The homeowner installs a central air conditioning unit costing $1,300, but it only increased the value of the home by $800. In this case, the $500 excess is deductible as a medical expense. Such valuation issues also could help in convincing the IRS that the cost, or at least a part of it, for a swimming pool is deductible. "That's the most common home improvement tax deduction question," says Anne-Maire Fisher with CBIZ Accounting, Tax & Advisory Services. "And there are times when a pool could be deductible. If it's prescribed as physical therapy, an ongoing treatment and not just for a few weeks. You also need to prove it was for medical purposes and are using it as prescribed." The best audit ammunition is a doctor's letter or statement detailing why a home improvement is recommended therapy for treatment of a chronic condition. In the case of a pool, for example, showing that not every nearby gym has a pool or not every pool is open year round could help convince the IRS of the medical claim's validity.

Filing Details

When claiming medical deductions, both the medically necessary home improvements as well as the more health care costs must be itemized on Schedule A. Only the amount that exceeds 7.5% of your adjusted gross income is deductible. Consider bunching your expenses, including home improvements, when possible. You probably don't want to wait on serious medical conditions, but if it's possible to push improvements into one tax year so that you get over the 7.5%, do that.