Guest Author - Katie Murphy

We just passed the dreaded April 15 deadline; actually it was April 17 this year. Why? I don’t know, but nevertheless, those of us who wait until the last minute took advantage of one more fun weekend before getting serious about IRS duties.

While taxes are still fresh in your mind, here are some tax saving ideas for 2007 related to remodeling, renovating and improving your home. You bought your dream home and now you want to improve it, which can be costly, but there is good news...the Internal Revenue Service may actually relieve part of the cost. Yes, you read correctly...the IRS!

A set of tax incentives for homeowners to make energy-efficient improvements took effect in 2006. A tax credit can provide significant savings. It reduces the amount of income tax you have to pay. Unlike a deduction, which reduces the amount of income subject to tax, a tax credit directly reduces the tax itself. You must refer to the final Internal Revenue Service (IRS) rules to determine what qualifies for the tax credit.

The home energy credits vary by project. A general rule is the more common and easier to install the smaller the credit.

Energy improvements
The Energy Tax Incentives Act of 2005 offers a 10 percent tax credit with a lifetime cap of $500 for conventional technology home improvements. The credit is based on the cost of new energy-efficient improvements such as insulation, exterior windows, exterior doors, water heaters, heat pumps, central air conditioners, furnaces and hot water boilers.

Within each conventional energy-saving category, the specific credit amounts also are limited. And the $500 cap applies to total energy upgrades made in both 2006 and 2007, not separately for each year. So if you claimed the maximum $500 worth of eligible energy improvements in 2006, you get none in 2007.

This portion of the credits expires Dec. 31. Tax breaks for solar-related upgrades, however, are allowed on an annual, not cumulative, basis and these credits will continue through 2008.

Solar tax savings
Homeowners who opt for the more expensive solar renovations can claim up to $2,000 in credits each year. Qualifying home improvements that count toward that annual amount include solar water-heating systems, solar equipment that generates photovoltaic electricity for the home and fuel-cell power systems.

EnergyStar.gov provides a helpful chart to help you determine the tax break. Use the chart before you purchase a system.

Also look for credit details on the packaging. Most manufacturers provide energy ratings and many have added labels alerting buyers that the item qualifies for one of the new tax credits.

Don't forget to check on your state's energy tax breaks via the Database of State Incentives for Renewables & Efficiency. To check incentives in your state visit: http://www.dsireusa.org/.

For instance, in Florida (my home State) the incentive for solar is $500 for a residential solar water heater and $100 for a solar pool heater.

Medical renovations
Residential modifications can provide deductions that could reduce a tax bill. Most of these, however, are in the medical area, which could mean costly upfront expenses.

You can include as medical expenses amounts you pay for special equipment installed in a home or for home improvements when the main purpose is medical care for you or your spouse. You can then deduct these amounts as long as you follow your doctor's orders and the IRS's rules.

Something that is helpful to a disabled person but doesn't increase the long-term value of the home is likely to be able to help reduce your tax bill.
If you need, for example, to add a chair lift to get up and down the stairs, the IRS generally considers that a legitimate expense. Other deductible projects that make a house more accessible for a handicapped resident or individual with chronic medical problems include adding ramps; widening doorways; lowering counters or cabinets; adjusting electric outlets and fixtures; installing rails and grab-bars; and changing hardware on doors.

In addition to deducting the actual remodeling costs, you also can deduct the ongoing expenses to maintain or operate any medically prescribed equipment.

To read detailed instructions on “Credit for Non-business Energy Property” visit: www.irs.gov/pub/irs-drop/n-06-26.pdf. It may be boring, but it provides the information you need to comply with the IRS regulations.