It is estimated that over 70% of all Americans get an income tax refund each year due to overpaying their income taxes on salaries, paychecks and other forms of income throughout the calendar year, and that money can go a long way towards paying off any existing home improvement loans you may have. And while loaning the government extra money is generally not a great way to get rich, there is an undeniable feeling of satisfaction in getting a large tax-free check from the government each spring!

One of the best ways to use that money effectively is to pay down an outstanding home improvement loan that you may have opened in the previous year.  Here’s how this might work:

Let’s say in 2008 you applied for a home equity loan to perform add an addition on your house or to improve your home.  For the sake of argument we’ll say that you took out a $10,000 home improvement loan in early 2008.  This home upgrade will probably increase the value of your home which may allow you to borrow money for more home improvements in the future.

As the work on your home progresses and as you pay off your loan you are also paying some interest on the monthly loan payment.  The interest might be around 6%.  The interest that you pay on your home improvement loan in 2008 can often be used as a deduction on your 2008 income tax.  So if you paid $500 in interest then in many cases you can deduct that from your gross 2008 income, which ultimately means you get a larger tax refund for 2008.

In 2009 you can then use your income tax refund to help pay down your home improvement loan, effectively getting rid of some of your debt.  By taking out a loan for a home improvement in one year and using the tax refund from the next year to help pay it off you can sometimes afford to continually be improving your home while reducing the income taxes you owe and increasing the equity in your home.

Most home improvements cannot be used as a tax credit, but there are some exceptions to this, especially when it comes to home upgrades that are needed for a medical condition or for special energy saving home improvement project.  Generally the interest paid on a home improvement loan or line of credit can be deducted from your income for tax purposes as long as the money is indeed used to improve your house.

Obviously, every tax and income situation is different and you may want to consult with a qualified tax professional to make sure this method of paying down home improvement loans will work for you.