Evansville, Newburgh IN Real Estate Blog

Real Estate Blog

Thursday, August 16 2012

Need to Modify Your Home for Medical Reasons? 2012 is the Year to Do It

With tax deduction limits coming for 2013, medically related home upgrades are a smart project this year.

What a difference year makes.

For the 2012 tax year, you can take a tax deduction on medically necessary home improvements — like installing a wheelchair ramp and other projects that make life easier for an ill or injured family member — if you:

Itemize deductions

Spend more than 7.5% of your adjusted gross income on the upgrades (10% of AGI if you’re subject to alternative minimum tax).

Starting in 2013, if you’re under age 65, you can’t take the tax deduction on medical expenses until you spend 10% of your AGI. But if you’re 65 or older in 2013, you can stick with the 7.5% AGI tax deduction threshold through the end of 2016.

The rules for tax deductions on medical home improvements are tricky:

1. Start with what it costs to modify your home.
2. Subtract the value the upgrades add to your home.
3. What’s leftover is your tax deduction — if you meet your AGI threshold.

How it works

Say you’re 45 years old and spend $20,000 to put a bathroom on the first floor of your home because your husband can’t climb stairs anymore. Your AGI is $100,000. A REALTOR® says the bathroom adds $10,000 to the value of your house.

1. Start with the cost of the improvements: $20,000
2. Subtract your added home value: $10,000
3. Of that $10,000 difference, you can only take a deduction for expenses that exceed 7.5% of your AGI or $7,500.

So if you itemize, you can take a $2,500 deduction for the 2012 tax year. Wait until 2013 and you get no deduction because your threshold rises to 10%. If you’re over age 65, though, you can claim a $2,500 deduction.

Tip: Doing all your improvements in a single year will help you meet the AGI threshold.

Some of the improvements that you can claim a tax deduction for, according to IRS Publication 502, “Medical and Dental Expenses”:

Entrance ramps for your home

Grading the yard before building a ramp, or to make it easier to get in your home

Widening exterior or interior doorways

Widening or removing hallways

Installing railings, support bars, or other bathroom improvements

Lowering or modifying kitchen cabinets and equipment

Moving or modifying electrical outlets and fixtures

Installing porch lifts and other forms of lifts (but elevators generally add value to the house)

Modifying fire alarms, smoke detectors, and other warning systems

Modifying stairways

Adding handrails or grab bars anywhere (whether or not in bathrooms)

Changing door knobs

Upkeep of medically necessary upgrades, like elevators, and operating costs

Lead-based paint removal if your child has lead poisoning

Renovating an existing bathroom to make it handicap accessible or adding a new accessible bath

Will the tax change encourage you to make necessary changes this year?

Posted by: Rolando Trentini AT 08:00 am | Permalink | 0 Comments | Email

Thursday, April 05 2012

2 Tax Deductions You Won't Get Next Year

Tax benefits for home owners disappeared at the end of 2011 and no one knows whether Congress will bring them back. How annoying!

Congress was so busy bickering at the end of 2011 that it allowed two important tax breaks for home owners to expire. Beginning with the 2012 tax year:

1. You can no longer deduct the cost of private mortgage insurance premiums.

2. You aren’t getting a tax credit for some of your home energy improvements.

You can take advantage of these provisions when you file your 2011 tax return — but beyond that, who knows.

Now that Congress is back in session, it’s likely going to pick up where it left off — arguing about what programs to cut and what taxes to raise. The programs, deductions, and tax credits supporting home ownership belong at the top their to-do list.

Up until the end of last year, you could deduct your private mortgage insurance premium (PMI) when calculating your income taxes. It was a benefit targeted to lower- and middle-income home owners. Once you made $100,000 or more, it started disappearing and anyone who had more than $110,000 of adjusted gross income couldn’t use it.

The home owners who have to get mortgage insurance are buyers with less than a 20% down payment and refinancers with less than 20% equity. That’s more often first-time home buyers or younger home owners and less often move-up buyers who’ve built up equity in their homes. So in taking away the PMI deduction, Congress is raising taxes paid by first-time home buyers and younger home owners leaving them with less money to spend on housing. That’s especially wrong-headed when the housing market is struggling to recover.

The tax credit for energy efficiency upgrades wasn’t enormous — it was capped at $500 or 10% of the cost for some projects; less for others. But it was a nice incentive to add insulation, new windows, or to upgrade your HVAC system with a more efficient unit — exactly the kind of actions that help decrease our dependence on fossil fuels, leading to a cleaner environment and less outflow of U.S. income to foreign countries. Not to mention, hopefully, smaller utility bills.

In 2012, home ownership and energy independence advocates will fight to get those expired tax rules back on the books and to have them apply retroactively. It’s a familiar fight — they had to do the same thing at the end of 2010.

But this year, the battle is more complicated because there’s a presidential election, discord between the major parties, and a general lack of consensus on any issues.

We home owners certainly don’t all agree on who to vote for, but most of us consider the renewal of those policies is a no-brainer. And we really don’t appreciate it when Congress lets those rules expire at the end of one year and then leaves us to wonder the rest of the next year whether they’ll be renewed.

Posted by: Rolando Trentini AT 08:00 am | Permalink | 0 Comments | Email