Medical Needs Can Help Pay For Remodeling

If you plan to grow old in your house, you'll probably need to have your home change as your body does. If you end up using a wheelchair, you'll need doorways wide enough to accommodate it. Respiratory problems might require air conditioning or special air filters.
Remodel it right, and the tax deductions will come.

The Internal Revenue Service offers write-offs for homeowners forced to make medically related alterations. However, like most things IRS, "these things aren't necessarily written in English," says Scott M. Estill, a former IRS senior trial attorney who now operates his own law practice in Littleton, Colo. As author of "Tax This! An Insider's Guide to Standing Up to the IRS," he helps taxpayers unravel the IRS mystery. If you can say, "But for the medical condition, I would not have made this home improvement," you have a deduction.

Ground rulesMany homeowners think that only people who are bound to wheelchairs are eligible for the break. But temporary health setbacks count, too. If multiple broken bones require a wheelchair ramp and landscaping to make it blend with your house to get you through even four months, Uncle Sam allows it. The possibilities are greater than you might think.

Here are some of the more common deductions for improvements that accommodate a medical condition:
* entrance/exit ramps.
* widening doorways.
* installing elevators or chairlifts.
* modifying stairs and/or installing special handrails throughout the house.
* modifying or lowering kitchen cabinets to accommodate a wheelchair.
* installing air-filtration/air-conditioning systems.
* bathroom modifications to accommodate the disabled.
* grading grounds outside the front door to provide easier access to the home. * modifying/adding new warning systems such as smoke-, fire- and health-alert calling systems.
* lowering light switches to wheelchair-accessible heights.
* modifying electrical outlets.
* swimming pools, whirlpool or Jacuzzi tubs -- but only if there aren't less-expensive alternatives, such as using the neighbor's pool.
* redoing drywall to remove mold.

Homeowners can't abandon common sense in this smorgasbord, however. For starters, says Sandy Botkin, CPA, CEO of the Tax Reduction Institute and author of "Lower Your Taxes -- Big Time," you must make the improvement to alleviate or address a specific medical condition. Being generally overweight won't work, but obesity meets the medical criteria. Aching joints won't get you as far as an official case of arthritis.

And only the treatment counts, so if your physician prescribes a filter to eliminate pollen in your home, but you buy an entire central air-conditioning system, only that filter is deductible.
"The IRS is most likely to challenge big expenses like elevators, outdoor decks and swimming pools -- improvements that also could be done for nonmedical reasons," says Estill. "It's like when the IRS audits a business. They're not after advertising and telephone bills. They look at meals, entertainment, travel -- things that have a lot of fun associated with them."

That's not to say swimming pools are an automatic audit flag, but writing off a $20,000 pool on a $40,000 income might attract unwelcome attention. So if you intend to deduct, cross all the t's on the paperwork.

Second, make sure you secure a note from the doctor stating that water therapy is critical to your treatment or recovery, not simply that you need to get exercise, Estill says.
"The more long-term the illness or disability, the more likely the IRS will permit it," he says. "If you say, 'I put in a swimming pool because I have a three-month rehabilitation program after surgery,' good luck. I won't make you any guarantees if I represent you in that one."

Third, keep the reins on the expense sheet. Botkin shakes his head at the couple who ordered European tiles to match their home's decor, went whole hog on the surrounding deck, splurged on automation and ran up a $195,000 bill.
"The tax court only allowed the reasonable cost of the pool -- end of story," he says.

Your best bet: Attach your doctor's recommendation for the improvement, along with an appraisal of your house showing the increase of its value with the improvement, to the tax return, says Botkin. That way, if the IRS doubts some of your claims, it can easily check the way in which you came up with your numbers.

The paperworkThe federal government naturally tosses a couple of "gotchas" into this section of the tax code. You may only subtract the expense that exceeds the improvement's increase to your house value. So if you do add an $8,000 swimming pool that raises your home value by $5,000, you write $3,000 on the tax line.

The good news is that it's the big-ticket items that affect the home's value. Architectural changes like widening doors or installing a few windows or guardrails normally don't impact the appraisal, Botkin says. Modifications and additions that do not add value can be deducted in full as medical expenses.

Next, your write-offs must exceed 7.5 percent of your annual adjusted gross earnings, which include interest, dividends, wages, rents, pensions, net income from businesses, moving expenses and retirement funds. According to Estill, that threshold isn't as daunting as it seems in years when an illness drops your income.

Botkin advocates smart tax planning to maximize your potential deductions when you face a long-term or permanent condition. Instead of dribbling out an elevator here, a ramp there, and a new hard surface floor in the next year, bunch them into one calendar year.
Even better, establish a legitimate full-time or part-time home business to skirt the 7.5 percent rule. This status allows you to hire the person in your household with special medical needs and set up a deductible self-insured medical reimbursement plan that refunds employees any medical expense the insurance plan won't cover, says Botkin.

However, you still must obey the house rules and reimburse only the difference between the final cost of the improvement and the increase in the home's net worth. If you don't have a spouse to hire, you will need to establish C-corporation status for your home business to render yourself the eligible employee.

Small home businesses get the advantage of choice, too. If you use your hammer and nails to make improvements that comply with the Americans With Disabilities Act, you can take a 50-percent credit on all eligible expenses between $250 and $10,250, Botkin says.

Medically related write-offs require Schedule A itemization. If you take the small-business ADA route, you also must file Form 8826.
To get your ducks in a row, make sure you have a doctor's prescription for the improvement written on his office letterhead. General practitioners' signatures hold up, so don't worry about chasing a specialist to sign off, says Botkin. However, the family doctor must be the physician who treats you -- your kids' pediatrician won't cut it. Nor can your spouse's doctor toss off a note for you. "The doctor must actually do an examination and diagnose you," Botkin says. "You'd be surprised how many cases the IRS gets where the doctors never saw the patient."

If your medical condition is temporary, Estill recommends keeping cost comparisons tucked away with the construction receipts and doctor's note as well.

"The IRS doesn't require them, but it's always something I'd use in an audit situation," he says. "I could make the case that if my client hadn't put in this $3,000 improvement, he couldn't live in the house for those three months. Therefore he'd incur the cost of renting an apartment on the ground floor, which qualifies for a medical expense and would have cost more." Overall, tax experts urge, if your motivation is right and you can support the claim, deduct. "I'm not suggesting you make stuff up, but if you think it's a gray area, why not claim it?" Estill says. "If you are in that 1 percent of Americans who are audited, you still have a better than 50-50 chance of having the IRS accept your medically related deduction."
Connie Kurtz, a U.S. Treasury enrolled agent, agrees. "It's a lenient area," she says.

Home improvements that can lower your capital gains

A lot more is riding on your home improvements than just making your house nicer to live in or getting a better price when you sell. Remodeling your kitchen, adding a bathroom or even planting some shrubs can reduce your possible capital gains taxes.

True, the tax code is generous in excluding from taxes a big chunk of home-sale profit. A single seller can walk away with up to $250,000 tax-free when he sells his primary residence; a married couple won't be taxed on $500,000. But if you net more than that, you are in for a nasty capital gains shock. And it's not just the superrich who are caught in this capital gains trap. People who have owned their homes for a long time may see substantial appreciation on the property. In some hot real estate regions, especially large cities and their suburbs, home prices have skyrocketed in only months, not years.
Robert Demmett, partner with the CPA firm of Eisner & Lubin LLP in New York City, has personally witnessed this phenomenon: "A client who lived in the Hamptons for 25 years and who sold his home made a gigantic amount of money."

No one wants to drop their home's selling price just to lessen taxes, but there are ways to work around the potential problem. The easiest method is to boost your home's value, or as it's known in tax talk, its basis. When you sell, you subtract your home's adjusted basis from its sale price to come up with your profit. If it exceeds the tax-exclusion amount, get ready to write a check to the U.S. Treasury. Building on your basisUncle Sam defines basis as the amount you paid for your house. It includes settlement and closing costs and any debt. If you inherited your home, your basis is the fair market value on the day the prior owner died.

You can increase your home's basis by spending money on improvements. Just make sure the upgrades meet IRS specs. A tax-acceptable improvement must add value to your home, "considerably" prolong your home's useful life or adapt your house to new uses. Examples include installing new plumbing or wiring, adding a bathroom, or paving the driveway.

"The overriding factor is doing something that improves or enhances the value of your home," says Jamshed B. Gandi, partner with the San Francisco CPA firm of Bertorelli, Gandi, Won & Behti. "If the items are purely for maintenance, to maintain the home, they are not included."
Simple common sense generally will help you determine what will add to your property's basis. The addition of a bathroom or an in-ground swimming pool, for example, adds to basis. Installing fancy wallpaper in the master bedroom does not. Fixing leaky faucets and replacing broken fixtures won't help, either -- they'll count only as repairs, which do not add value to or extend the life of your home.

The IRS provides a helpful chart on Page 8 of its Publication 523, Selling Your Home. The list of tax-acceptable improvements includes:
* Additions such as a bedroom, bathroom, deck, garage, porch or patio.
* Heating and air conditioning (for example, putting in new systems).
* Plumbing (for example, installing a new soft-water system).
* Interior improvements, such as built-in appliances and wall-to-wall carpeting.
* Insulation additions to the attic, walls, floors, pipes or ductwork.

The IRS even includes such miscellaneous items as a central vacuum, wiring upgrades or a satellite dish. So enjoy your Direct TV's 700 channels now and when you sell.

Another common and often-overlooked improvement, according to Demmett, is landscaping. Paving your driveway, erecting a fence or even putting in a retaining wall can add value to your home, boost its basis and reduce your capital gain when selling.

Also, don't forget those myriad costs associated with your house purchase. Land-survey costs, attorney fees and your broker's commission all add to the value or basis of your home, says Demmett.
Documenting your home improvementsExperts agree that the biggest mistake that homeowners make is not documenting home improvements. Even if you have no plans to sell, hold onto every Home Depot and contractor receipt.

"People tend to lose their receipts. They need to keep all their receipts and invoices, throw them into a file," says Jeffrey J. Spengler, a principal at the CPA firm of McCrory & McDowell LLC, in Pittsburgh.

But don't go overboard. Homeowners often erroneously include home improvements for which they were reimbursed. "We had a pretty wicked ice storm here a few years ago, and it seemed like everyone in my neighborhood had their roof replaced," Spengler says. "Since it was storm-related and paid for by insurance, this doesn't add to the value of your home."

And don't discount something just because it doesn't fall neatly into the home-improvement category. It still might be useful in offsetting possible capital gains. If you spruce up your house with a new paint job to make it more attractive to buyers, that counts as a selling expense, Spengler says. Selling expenses lower the amount you realize on the sale of the home, which in turn lowers the profit you make.
Home basis in black, white and grayRemember, too, that home improvement versus repair is a gray, rather than black-and-white, tax issue. It makes good sense to run any construction projects by your tax adviser, accountant or real estate agent for guidance on whether the project will pass the IRS test for increasing home value.

And if the project doesn't pass? "When an audit question comes up with the IRS about a home improvement, I'll have the auditor contact the president of the local board of Realtors here," says J. Michael Roberts, owner of Creative Tax Solutions, an accounting firm in Laguna Hills, Calif., and chairman of the California Association of Realtors' Real Estate Finance Committee.

Local Realtors can advise the IRS on what they believe are legitimate home improvements that add value. Indeed, Roberts points out that such definitions can vary by region and neighborhood. For example, in most cases, a stove replacement might be considered simple maintenance. But if you live in a posh neighborhood and you replace a four-burner no-name electric stove with a six-burner upscale Viking, along with adding other pricey built-in appliances, then you've transformed your kitchen into a gourmet eatery worthy of Emeril and, thus, boosted the basis of your home.

"It's really funny how in one area something that might be considered an enhancement might be standard in a different area," Roberts says.
Figuring your home-sale gain or lossTo determine whether you made a profit and might owe taxes on your home's sale, start with the selling price. This is the total amount received for your home, including money, all notes, mortgages or other debts assumed by the buyer as part of the sale.

Next, subtract any selling expenses, including advertising, painting or other upkeep performed to improve the appearance and marketability of the property. This will give you the amount realized.
Now subtract your adjusted basis from the amount realized. The result is your gain or loss.

You'll come out tax-free if your gain is $250,000 or less and you're a single seller; twice that amount if you and your spouse sell the house. You also must have lived in the home for two of the last five years that you owned it.

There is an exception for military personnel to the time-of-residence requirement. Members of the armed forces can suspend the five-year ownership-and-use test period for the time during which the member, or his or her spouse, served qualified official extended duty.
If your gain is more than the limit, it could be time to start digging through your records to find documentation that could help you increase your adjusted basis.
And if you sold at a loss, sorry. There is no tax break for these unlucky sellers.

Don't let shoddy contractors demolish your budget

When someone comes to your house and starts smashing down walls, tearing out appliances and punching holes in ceilings, it's best to know exactly who you are dealing with. As a smart homeowner, you've already used Bankrate to lock in a low interest rate on a home equity loan and to find out which remodeling projects pay you back the most. Now is no time to get nailed by a shoddy contractor.

According to the remodeling activity indicator released Jan. 13 by Harvard’s Joint Center for Housing Studies, Americans spent $149.5 billion on home improvements last year, up 4.3 percent from 2004's total. Lots of work means lots of contractors -- and lots of ways to get scammed.

Slam the scamIn 2005, the Better Business Bureau received 5,728 consumer complaints regarding construction and remodeling services, ranking relatively high at 22 out of 2,840 complaint classifications.
Sheila Adkins, director of public affairs for the Council of Better Business Bureaus, says there are three main reasons for the flood of complaints:
* Homeowners don't get all the details written into the contract before signing it.
* Homeowners select contractors based on price alone without investigating their backgrounds.
* Homeowners get duped by outright scams.

These fly-by-night artists fall into three broad categories.
There's the lowball artist, a shady operator who intentionally bids below his legitimate competitors, then makes costly changes or skimps on workmanship to recoup a profit.

Then there's the slipshod businessman whose intentions may be honorable but whose incompetent estimates and overall poor judgment end up costing you money.

Last, there's the con man, an outright criminal who promises anything at any price, demands his money upfront and vanishes.
"These are the door-to-door home contractors who claim to be doing a job at your neighbor's house, they have leftover materials and would be happy to patch your leaky basement, repave your driveway or check your furnace," says Adkins.

Protecting yourself against the con artist should be easy, she says.
"Contact your local BBB and ask for a list of members in that industry. That's just being a wise consumer," Adkins says. "If you're spending several thousand dollars, I think you want to make sure you're giving it to a reputable company."

Contracting 101OK, you've successfully avoided the outright scam artists. But you're not out of the woods yet. There are plenty of other ways your remodeling budget can head south, the first and perhaps most important being the failure to calculate an accurate budget.

To get a ballpark idea of what your project will cost, check out the median national averages as compiled by Remodeling magazine.
Remodeling costs: national averagesKitchen (major remodel) $43,862
Bathroom addition $22,977
Bathroom remodel $10,499
Home office remodel $13,143
Basement remodel $51,051
Two-story addition $80,133Source: Cost vs.
Value Report, Remodeling Online

A number of other Internet sites can also help you arrive at a more accurate budget for your remodeling project. One of the best is ImproveNet, which helps calculate the cost of labor based on the size of your job, materials you might want to use and the quality you desire. Next, you need to determine which types of home professionals you'll need to hire.

For minor work, an experienced general contractor likely will be the most cost-effective. A specialized contractor, however, may save money over a general contractor by knowing the timesaving tricks of the specialty.

If major work is involved, especially if there are design, aesthetic or structural issues, an architect may be needed to draw detailed plans and obtain permits. To save on costly architectural fees, consider instead a certified or licensed designer who generally specializes in particular types of projects (kitchens, interiors, baths, etc.). Or consider a design/build contractor who specializes in seeing major renovations through from start to finish.

A 'good sense' listTo save headaches later, consider drawing up a short list of qualified professionals in your area by logging on to the National Association of the Remodeling Industry, the National Association of Home Builders or the Better Business Bureau. To help your search go smoothly, you could check out how to hire a professional remodeler.

It's also good sense to make sure the contractor you choose has:
* verifiable business licenses, certification and professional affiliations.
* previous work experience, including a verifiable list of local customer references.
* financial security (check banking and supplier references).
* adequate insurance to protect you and your property against loss or suit.
* good communication skills.

That last item should not be taken lightly. When you get down to writing the contract, clear communication on both sides is your single best insurance against a remodeling nightmare.

No-nonsense contract talkOnce you've solicited bids from several licensed professionals, studied them carefully and selected your contractor, it's time to commit the project to paper. In general, remodeling contracts come in three flavors:
* Cost plus. You and your contractor arrive at an estimated cost and you agree to pay all actual costs plus the contractor's fee. It's a common type of bid, but you assume the risk of cost overruns and corrections.
* Turnkey. The contractor commits to a fixed price for cost overruns. Change requests are documented, signed by both parties and typically paid for prior to the change being made.
* Combination. If you choose to do part of the work yourself, you may combine elements of the cost plus and turnkey approach. The key is making each party's responsibilities absolutely clear.

Your contract should include:
* detailed descriptions covering all aspects of the work to be done.
* remodeling plans signed by both parties.
* payment plan (never pay more than 30 percent down).
* start and finish dates.
* change order process, to be approved by you before work is done.
* final inspection and sign-off requirement prior to final payment.

In addition, include these provisions:
* Cancellation rights. When you sign a remodeling contract, you have three business days to change your mind and cancel it. Contractors are required to tell you about this right and provide you with any cancellation forms.
* Lien protection. On large projects involving subcontractors, protect yourself from liens against your home in the event your primary contractor fails to pay the subs. This can be done by a release-of-lien addendum or by placing your payments in escrow until the work is finished.
* Permitting. It is the contractor's responsibility to obtain building permits, if required, and to perform the work in accordance with all building codes.
* Warranty clause. Make sure all warranties on products and materials installed by your contractor are in writing and verified.

Control the qualityYou've heard the old phrase "built to spec," right?
Well, specifications, or specs, are written instructions detailing how the work on your project is to be completed, including installation processes, materials and actual products to be used. Without specs, a contractor is free to complete the work to his or her satisfaction, not yours.

If your project is a major one and your budget allows, have your architect include specs with your blueprint and hire a knowledgeable professional as your independent inspector to make sure the work is performed "to spec."

Bottom line: The best-laid plans of home remodeling have a way of going awry without your watchful eye to oversee the process from start to finish. If you want it done right, hire a reliable professional, get everything in writing in the contract, and then watch over it like a hawk to make sure your contractor is performing quality work.
Then, of course, sit back and enjoy what you have caused to be done so well.
source from : bankrate.com