You may be able to reduce your income taxes by taking out a loan to cover some much needed home improvements. Not all home improvements qualify for a tax deduction or tax credit, but in certain kinds of home improvements can decrease your taxes not just for the calendar year in which you finish the project, but also for years to come.
If you are required to perform a home improvement project or remodel part of your home to accommodate a medical condition then all or part of the cost of that project may serve as a tax deduction, which means you can reduce that amount from your taxable income for the year.
If, for example, someone in your home is suddenly confined to a wheelchair you may be able to deduct the amount it takes to install an elevator, lower kitchen cabinets or simply widen doorways in your home. Only certain home improvements related to medical costs apply, and you may need the written statement of a doctor or medical professional.
Likewise, the latest Stimulus Package has added tax credits to the 2009 and 2010 calendar years for certain energy saving home improvements including installing new energy efficient windows, doors, certain types of roofs, heating and air conditioning units. You can use up to 30% of the cost of any project as a tax credit, with a total of up to $1,500.
For example, installing $6,000 worth of solar panels on your home may qualify you for the maximum $1,500 tax credit at the end of the year. In addition, some states and even some utility companies offer additional money-saving and tax incentives for making your home more energy efficient.
Obviously, not all home improvements are eligible for a tax deduction. You should talk to an income tax professional or research some of the details surrounding home improvement tax deductions before you embark on any home upgrade or remodeling project.
You obviously may not be able to afford all of these projects without borrowing some money, but even certain home improvement loans can lower your taxes if the money is borrowed against the mortgage or equity in your home.
If you take out a home equity loan specifically for home improvements you can often use the interest you pay on the loan as a tax deduction. This is an option that is available with only certain types of home improvement loans. Each year the loan is open and you pay interest on the loan is another year you can deduct that interest amount from your taxable income in some cases.
Again, before you perform any home improvement or apply for any type of home improvement loan for tax reasons you should definitely speak with a qualified tax accountant to make sure your home improvement plans and loans are going to follow the letter of the law and be eligible for the greatest tax deductions or tax credits.
Let’s first talk about how a typical home improvement loan from a bank or lending institution works. Let’s say you borrow $10,000 to build a new deck on your home. You pay back the loan over time, but you also pay a little extra money, called interest, that is agreed upon when the loan is signed. This interest is essentially the profit that the bank makes for loaning the money to you. If you borrow $10,000 and agree to pay it back over 5 years (plus interest) then at the end of those five years you may actually have paid $13,000 or more. Sometimes the rate of interest through the life of the loan stays the same, but sometimes that rate goes up or down and can dramatically affect your monthly payment.