Could Your Home Renovation Be Eligible for Tax Deductions? Here’s What You Need to Understand

Tax season is upon us—one of the most stressful times of the year for many. But if you're a homeowner who made improvements or renovations last year, we’ve got good news: You may be able to reduce your tax burden this year, depending on the type of project.

In the following section, we'll guide you through the basics of claiming deductions for home renovations and upgrades. Keep in mind that working with a tax professional is always recommended to avoid errors or, worse, leaving money on the table. As Shatonya 'Rosie' Thomas, CEO and founder of Thomas Financial, states, 'There are many tax strategies and deductions available.' She continues, 'Many taxpayers overpay in taxes year after year by not taking full advantage of available deductions.'

Energy-Efficient Home Upgrades May Qualify for Tax Credits

While it would be nice to deduct a brand new kitchen or a luxurious spa bathroom from our taxes, that’s unlikely to happen anytime soon. However, there are some less glamorous, energy-efficient upgrades that might help reduce your tax bill. As DR Richardson, co-founder of Elephant Energy, explains, 'At the federal level, the Energy Efficient Home Improvement Credit offers tax incentives for homeowners who make energy-saving upgrades.' He adds, 'Starting in tax year 2023, homeowners became eligible for tax credits that can help offset some of the costs of these energy-efficient improvements.'

Examples of such upgrades, according to Richardson, include improvements like insulation, heat pumps, and heat pump water heaters.

Can You Claim Deductions for Cosmetic Home Improvements?

While cosmetic upgrades are generally not deductible, there are some exceptions. If you’ve ever considered installing a skylight, replacing old, drafty windows, or upgrading your front door, these improvements may qualify for a tax credit if they enhance energy efficiency.

Deductions Have Limits

As with most tax deductions, there are limits on these upgrades. 'Energy efficiency credits are capped at $1200 per year, while heat pump and heat pump water heater credits are capped at $2000 annually,' explains Richardson. 'There is no lifetime limit on these credits, so you can apply for eligible expenses every year.'

Typically, these credits are structured as 30 percent of the cost, up to a cap. For example, the heat pump tax credit offers 30 percent of costs, up to $2000. If you spend $1000, you could get a $300 credit; if you spend $10,000, you could get a $3000 credit.

Depending on your state, additional deductions might be available.

Can Decorating Ever Be Tax-Deductible?

Decorating expenses are usually not tax-deductible unless they are directly related to business activities. 'To qualify for tax deductions, it's essential to clearly define the purpose of the decoration and ensure it's tied to your business,' Thomas advises. 'Keep your decoration work-related, understand what types of decorating are deductible, maintain proper records, and comply with IRS guidelines.'

Beyond specific work equipment (like computers and tech gear), furniture and decor for your home office might also qualify for a deduction. If you've bought a new desk, an ergonomic chair, or even a piece of artwork for Zoom calls, these items could be eligible.

Small-scale renovations may also qualify for tax deductions, such as custom cabinetry designed to store supplies or paperwork.

Make sure to save all your receipts and inform your accountant.