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Are you considering retiring in your forever home? Make sure your house is ready for this major life change by taking advantage of tax deductions for medically necessary home improvements. According to AARP, more than 75% of adults aged 50 and older want to “age in place” in their current homes. However, one-third say they need modifications to make that happen.
Not only can these upgrades make your home more comfortable and accessible for your retirement years, but they can also have significant tax benefits. In this comprehensive guide, we’ll go over everything you need to know about tax-deductible home improvements for retirement in 2025.
Making the Right Home Improvements for Retirement
When it comes to retirement planning, it’s essential to consider not just your financial needs, but also your living arrangements. While downsizing may seem like an attractive option, many retirees prefer to stay in their longtime homes. In fact, the majority of baby boomers plan to retire in their current homes, according to research from the Joint Center for Housing Studies at Harvard University.
However, as we age, our homes may need to be modified to accommodate mobility limitations and other health challenges. That’s where tax deductions for home improvements come in. By utilizing these deductions, you can make necessary modifications while also reducing your tax bill.
Understanding the Medical Expense Tax Deduction
So how exactly do these tax deductions work? The IRS allows taxpayers to deduct medically necessary home improvements if they meet specific requirements. These deductions fall on the medical expense tax deduction, which requires you to itemize your tax return rather than claim the standard deduction. Data show that only 1 out of 10 people itemize when filing federal taxes, so it’s crucial to understand the process in detail.
To take advantage of the medical expense tax deduction, your total medical expenses must exceed 7.5% of your adjusted gross income (AGI). For example, if you have an AGI of $200,000 and medical expenses of $20,000, you can deduct $5,000 from your federal income tax return. It’s essential to note that not all medical expenses are deductible, so it’s best to consult with a tax professional or check out the IRS website for a complete list of eligible expenses.
Determining Eligibility for a Tax Deduction
One of the main qualifications for claiming a medical expense tax deduction is that the upgrades must benefit yourself, your spouse, or your dependents. Additionally, the modifications must be incurred primarily to alleviate or prevent a physical or mental disability or illness. And lastly, they must not be covered by insurance.
It’s crucial to have a doctor’s note citing a disability, illness, or disease to substantiate why you need the upgrade. Without this documentation, you may not be eligible for the deduction.
Top Aging-in-Place Home Improvement Projects
So what types of home improvements qualify for these tax deductions? The National Association of Home Builders recently surveyed a group of remodelers about which aging-in-place projects homeowners choose. Here are a few ideas for your next home improvement project:
– Support bar fixtures in the bathroom (93%)
– Curbless shower (83%)
– Higher toilet installations (77%)
– Widening doorways for mobility limitations
– Improved lighting for heightened accessibility
However, not all of these projects may qualify for a tax deduction, as some may add value to your home. For example, upgrades that increase your property’s architectural or aesthetic value are not permitted. It’s crucial to consult with a tax professional and obtain a doctor’s note to determine eligibility for the deduction.
Potential Home Improvements That May Not Lower Your Taxes
While many aging-in-place home upgrades can save you on taxes, some may not have the same impact. Elevators and swimming pools are two examples of improvements that may not be deductible, as they are often considered recreational rather than medically necessary. Additionally, general home repairs and maintenance are not eligible for tax deductions.
Understanding the Impact on Property Taxes and Capital Gains
It’s essential to keep in mind that home improvements can have other tax implications, such as property taxes and capital gains. Improvements can increase your property tax liability, as your home’s value will likely increase. Similarly, when it comes time to sell your home, improvements can impact your capital gains taxes.
However, if you meet specific requirements, you may be able to avoid capital gains taxes through the capital gains tax exclusion. A substantial home upgrade can reduce your capital gain, making it less likely to be taxed. It’s crucial to keep detailed records of all improvements made to your home to prove their impact on your taxes.
Documenting Your Home Improvement Projects for Tax Purposes
To substantiate your home upgrades for tax purposes, you’ll need to keep detailed documentation. This can include contractor agreements, purchase orders, receipts, and cancelled checks. By having this documentation on hand, you can easily prove the impact of your home improvements on your taxes.
Plan for Your Retirement Home Needs Today
Retiring in your forever home can provide comfort and independence as you age. However, it’s essential to plan for your future needs and any potential tax implications. By utilizing tax deductions for medically necessary home improvements, you can make your home comfortable and accessible for your retirement years. So make sure to consult with a tax professional and start planning for your aging-in-place home improvements today.