On a regular basis, I have clients ask a most basic accounting question – “How can I lower my tax liability?”
That answer is always a hard one, as there are so many variables involved – marital status, income, deductions, credits, equity, home ownership, business ownership, children, etc.
One nearly universal strategy I recommend for people who own homes that are at least 8 years old, though is simple – fix everything that you can in it!
What does that mean? Simple: A home that is nearing ten years of age or older has multiple systems in it that are not as energy efficient as those same systems today. Most people look at insulation when it comes to energy-efficiency, but the HVAC system, water heater, and electrical system is a more telling example.
We’ll get into more detail about that A/C system in a few minutes, but let’s start with the basics:
There are a lot of potential tax credits in repairing your home, and tax credits are superior to deductions. Why? That credit is a dollar-for-dollar reduction in what you owe, not a deduction on your overall income. Now, what we’re talking about in these examples falls into what is called the Residential Energy Efficient Property Credit and can qualify you for up to a 30% tax break on items like geothermal water heating, solar panels installation, and other upgrades to existing systems in your home. The benefit, of course, goes far beyond the tax breaks, though, because each of these upgrades serves to lower the monthly “nut” that you have to cover to pay for the home and the associated expenses of owning it.
At the same time, more mundane upgrades like doors, windows, that insulation we mentioned earlier, and even types of roofing materials help to give you a break in what the IRS terms “qualified energy efficiency improvements” and there is even another category, “residential energy property costs” which allow you, as the homeowner, to claim credits with HVAC systems, heat pumps, natural gas upgrades, and furnaces.
Why are these important? Well, let’s go back and talk about that air conditioner that you don’t want to replace. What most of us don’t know is that the traditional refrigerant used in home and business HVAC systems is being phased out of use and for systems that are 8 or 10 years old, the cost of fixing them versus upgrading them is going to be excessive. Even refilling one leaky system after fixing it can approach $1,000 (plus the actual repair costs!) so the idea of using those monies to upgrade to a newer system in lieu of “fixing” it again may lower your overall operational expenses in the long run.
Let’s face it, most of us (Florida) cannot fathom not having AC in the summer, so understanding how repairing compares with upgrading can be an important part of your tax strategy as older systems begin to have problems and the cost of replacement versus refurbishment can be offset by knowing there are tax breaks that can help.
Would you rather hear that from the repairman or from a tax specialist? If you have had to replace or are thinking of replacing any of the large systems in your home – or of a total renovation – then I invite you to talk to me and the team about your plan. It may be that there are some hidden tax breaks in your plan that can allow you to recoup those expenses far faster than you initially thought.
Call me Patrick LeClaire @407-287-6638 to plan an exit stategy to your tax liabilities with the IRS.