What Home Improvements Are Tax Deductible in 2023?

Think it’s impossible to improve your home, reduce your carbon footprint and get a break on your taxes? Think again. Incentives in the 2022 Inflation Reduction Act (IRA) and other laws can save the average family hundreds or even thousands of dollars a year.

Below, experts walk us through incentives you can take advantage of today. Nine million people didn’t receive tax benefits they were owed in 2021. Don’t be left out!

Home Improvement Tax Incentive Terminology

Before we get to the tax breaks, it’s important to know some common terms.

• Tax credit: These are dollar-for-dollar reductions on your tax bill. When you claim a tax credit, the amount you owe goes down the exact same dollar amount.
• Tax incentive: These encourage taxpayers to do something, like install efficient appliances, in exchange for a tax reduction.
• Tax refund: You’re probably familiar with this one already. You’ll get a refund if you pay more in taxes — say, through your paycheck withholdings — than you actually owe.
• Tax rebate: These are retroactive tax decreases. Unlike refunds, they can come at any time of year. Rebates are often offered to stimulate the economy, because people tend to spend them immediately.
• Tax break: A general term referring to various tax benefits. These could be credits, deductions, exemptions and others.
• Tax benefit: Similar to a tax break, these lower your tax liability.
• Home improvement tax deduction: Qualifying improvements to your home that qualify for tax deductions.

What Home Improvements Are Tax Deductible in 2023?

Most home improvements, like putting on a new roof or performing routine maintenance, don’t qualify for any immediate tax breaks. However, some (known as capital improvements) may raise the value of your home. In that case, you may see a benefit when you sell.

For immediate benefits, check out these incentives that will reduce your 2023 taxes:

Energy efficiency tax credits

Reducing energy consumption saves money and natural resources. The IRA includes multiple clean energy tax credits to help you do both.

• Heat pumps: Your air conditioning and furnace are two of the biggest energy users in your home. Switching to an energy efficient heat pump can net you a 30% credit, up to $2,000.
• Windows and doors: Replacing leaky doors and windows brings a 30% credit on the cost, up from 10% last year. Credits are capped at $600 for windows and $500 for two doors.
• Insulation: Replacing your old insulation also comes with a 30% credit, also up from 10% last year.
• Electrical upgrades: If you need to update your electrical panel to handle new appliances, the government will pay 30%, up to $600.
• Home energy audit: To get the most out of these tax incentives, start with a home energy audit. A credit of up to $150 offsets the cost.

Don’t stop there. “[I]ncentives on items like solar, energy storage, EVs [electric vehicles] and more are incredibly generous,” says Greg Fasullo, CEO of Elevation, a residential clean technology company.

Installing solar panels gets you a 30% credit. Depending on the size of the project, Fasullo predicts you could save $6,000, based on the average rooftop solar installation cost of $20,000.

Home office tax deduction

Working from home since the pandemic? Fifty-eight percent of American workers are, too, at least part of the time.

If you use a portion of your home exclusively for business purposes, “you may be able to deduct a portion of your mortgage interest, property taxes, and other expenses related to that space,” says Seth Diener, a private wealth manager at Diener Money Management.

The Internal Revenue Service (IRS) has specific rules about what qualifies as a home office, though. If you’re doing Zoom calls from the kitchen table where you eat dinner every night, that doesn’t count. You must have a separate room or area that’s only used for your home office. If that’s you, you can calculate this deduction two ways:

• Regular method: Figure out the percentage of your home you use for work. The deduction you can claim is based on this number, and whether your expenses are direct or indirect.
• Simplified method: Calculate the square footage of your home office and multiply it by $5 per sq. ft., up to 300 sq. ft., with a maximum deduction of $1,500.

Medical improvements

“If you have medical upgrades that are prescribed by a doctor, such as wheelchair ramps or other accessibility features, these may be deductible as medical expenses,” says Andrew Latham, a certified financial planner and director of content at SuperMoney.com.

The IRS website offers a non-exhaustive list of qualifying capital expenses, including widening doorways, moving electrical devices, adding handrails and grading the exterior.

Note: If the medical home improvement raises the value of your home, the deduction will be based on the difference between the cost of the improvement and the increase in property value.

Rental property investments

Improvements to rental properties fall under a deduction called depreciation.

“Improvements to a rental property are usually considered deductible business expenses,” Latham says. “However, these incentives are subject to specific rules and limits, so it’s advisable to check current tax laws or consult with a tax professional.”

Federal vs. State Home Improvement Tax Incentives

What if you put in that heat pump and got back $2,000 from the federal government? Could you also claim the credit on your state return?

“Yes, in some instances, you can qualify for multiple tax breaks for the same project,” Latham says. “[I]f you install a new energy-efficient heat pump, you might be eligible for a federal tax credit, a state-level incentive, and potentially a rebate from your local utility company.”

Latham says rules vary, so it’s always a good idea to ask a tax professional for advice.