Evolving Tax Provisions and Home Renovations

Published: November 2, 2020

By Mark Luscombe

Many people working from home during the COVID-19 pandemic have considered this time as an opportunity to look around and decide to do some fixing up around the home. Several reported surveys have indicated that three quarters of homeowners have made a home improvement during the pandemic, and three quarters also plan to make a future home improvement.

The motivations may be to create a comfortable/efficient space for working from home or for home schooling, including technology upgrades, or just doing projects that have been long thought about but now are easier with more time spent at home. As with many things in life, it is a good idea to keep taxes in mind while making such decisions.

The tax law in several respects encourages home improvements with tax breaks. However, there have also been some changes in the law in recent years that could catch some home remodelers by surprise.

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  • There is a $500 credit for energy-efficient improvements to a home, including exterior doors and windows, insulation, roofs, certain furnaces and fans, air conditioners, water heaters and heat pumps. However, many homeowners may have already used up this credit in past years, and the credit currently expires at the end of 2020.
  • There is a credit for installation of qualified solar electric property, qualified solar water heating property, qualified fuel cell property, qualified small wind energy property and geothermal heat pump property. The credit is 26 percent of the cost in 2020 and 22 percent of the cost in 2021.
  • Many states also have tax breaks for energy-efficient home improvements in the form of income tax credits, sales tax exemptions or property tax incentives.
  • While the Tax Cuts and Jobs Act eliminated itemized deduction for interest on home equity loans, this interest may still be deductible to the extent that the money was spent to improve a home.
  • The Tax Cuts and Jobs Act also eliminated the itemized deduction for an employee’s unreimbursed business expenses, so an employee’s unreimbursed home office expenses are no longer deductible. A self-employed person may still be able to deduct those expenses.
  • Employees are not taxed on expenses that are reimbursed by employers under an accountable reimbursement plan. A handful of states requires employers to reimburse employees for necessary business expenses.
  • Some home improvements may qualify for an itemized medical expense deduction if the improvements are prescribed by a physician for the treatment of a disease or disability and to the extent that the cost exceeds any increase in the value of the home.
  • The medical expense deduction threshold, which remains at 7.5 percent of adjusted gross income (AGI) on 2020 tax returns, under current law reverts to 10 percent of AGI for 2021 tax returns.

The author, Mark Luscombe, JD, LL.M, CPA, serves as principal federal tax analyst at Wolters Kluwer Tax & Accounting.

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