Tax Plannning Tips

8/14/2019 Tax Plannning Tips

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TAX PLANNING TIPS: AUTO INSURANCE

It's no secret that auto insurance can safeguard your assets and provide you with peace of mind. But didyou know that auto insurance may also benefit you at tax time? Certain insurance-related costs can bededucted on your individual federal income tax return. You'll need to know what can be deducted, andhow insurance reimbursements can affect those deductions.

You can't deduct your auto insurance premiums if you use your car only for personal purposes

If you use your motor vehicle only for personal purposes (like most people), you can't deduct your autoinsurance premiums on your tax return.

If you use your car for business purposes, you may be able to deduct some car-related expenses,including insurance premiums

Whether you're self-employed or an employee, you may be able to deduct certain car-related expenses ifyou use your car for business purposes. However, if you use your car on business and your employerfully reimburses you for your expenses, you can't deduct those expenses. If you use your car for bothpersonal and business reasons, you can deduct only that portion of your car expenses that can be tracedto business use. (For individual taxpayers, commuting to work normally doesn't qualify as business use.)

At tax time, you take your deduction as a miscellaneous itemized deduction. Miscellaneous itemizeddeductions are deductible only to the extent that they total more than 2 percent of your adjusted grossincome (AGI). So, if 2 percent of your AGI equals $2,000 and your total miscellaneous itemizeddeductions (including business-related auto expenses) only come to $1,900, you won't be able to deductyour auto expenses on your tax return.

There are two methods for calculating auto expense deductions--the standard mileage allowance and theactual expenses method:

Standard mileage allowance: If you own or lease a car and are not reimbursed for the businessuse of your vehicle, you may be able to deduct a standard mileage rate of 40.5 cents per mile (in



2005) for each mile you use your car on business (up from 37.5 cents in 2004). Severalrequirements apply, however. You can also deduct the cost of business-related tolls and parking(but not commuting-related tolls and parking).Actual expenses method: You may be able to deduct the actual cost of using your vehicle forbusiness. Your business expenses can include depreciation, tolls, parking fees, insurancepremiums, repairs, gas and oil, rental fees, lease fees, excise taxes, and garage rental fees (tothe extent that the costs were related to business and not your personal use).

No matter which method you use, the IRS requires that you keep careful records of your business travel,including the dates you used your car, the number of miles driven, and the reason for the travel onbusiness-related tasks.

If your car is stolen or damaged, you may be able to claim a theft or casualty loss deduction

If your car is stolen, damaged, or destroyed in an accident or by an act of nature (e.g., fallen tree, flood),you may be able to claim a theft or casualty loss tax deduction if your auto insurance coverage does notcompletely reimburse you for your loss. (A casualty is the damage, destruction, or loss of propertyresulting from an identifiable event that is sudden, unexpected, or unusual.)

For individual taxpayers, the casualty and theft deduction is an itemized deduction that is subject to two

limitations. First of all, you can't deduct the first $100 of any loss. So, if your $99 used radio is stolen fromyour car, you're out of luck (at least in terms of a deduction). Second, even if your loss exceeds $100, youcan only deduct casualty and theft losses if the total amount you lost in the year (after the $100 percasualty threshold) exceeds 10 percent of your AGI.

You must file federal Form 1040 and itemize your deductions on Schedule A to claim a casualty or theftloss deduction. Use Form 4684 to figure the amount of your deduction, and consult a tax professional ifyou need help.

If you're reimbursed for your loss, you must subtract the reimbursement when calculating your loss. Inother words, you do not have a casualty or theft loss to the extent you are reimbursed. If your property iscovered by insurance, you should file a timely insurance claim for reimbursement of your loss. Otherwise,you may not be able to deduct your loss. Generally, you must also file a police report for any theft losses.

What about auto insurance deductibles?

Auto insurance protection does not begin until the deductible has been satisfied. So, if you have an autoinsurance policy with a $500 collision deductible and you get into an accident, you'd have to cover the first$500 of your loss out of pocket. At tax time, though, this deductible may be written off on your tax return(subject to the $100 and 10 percent rules) as a casualty loss if you meet all necessary requirements.However, you can't deduct a casualty loss involving a car accident if your willful negligence or willful actcaused the accident.



TAX PLANNING TIPS: DISABILITY INSURANCE

The income you receive from disability income insurance may or may not be taxable. The taxability ofdisability income insurance benefits depends on what type of benefits you receive, whether the premiumswere paid with pretax or after-tax dollars, and who paid the premiums (you or your employer).

Individual disability income insurance

The rules surrounding taxation of individual disability income insurance benefits are generally simple.Because you pay the premiums with after-tax dollars, the benefits you receive are tax free. However,unlike health insurance premiums, you can't deduct premiums paid for individual disability incomeinsurance as a medical expense.

Sometimes, your employer pays for an individual disability insurance policy on you. This may be the caseif you are considered to be a key employee of the business. If so, different rules may apply. If theemployer gets the benefit, then the premium is not deductible to the company, and the benefit is nottaxable when received by the company.

Employer-sponsored group disability insurance

If you are enrolled in a group disability insurance plan sponsored by your employer, the taxability of yourbenefits depends on who pays the premium. If you pay the total premium using after-tax income, thenyour benefits will be tax free. On the other hand, if your employer pays the total premium and does notinclude the cost of coverage in your gross income, then your benefits will be taxable.

If your employer pays part of the insurance premium and you pay the rest, then your tax liability will besplit as well. The part of the benefit you receive that is related to the employer-paid share of the premiumis taxable; any part of the benefit related to your share of the premium is tax free.

If you pay part of the premium for employer-sponsored disability coverage, the type of dollars you use topay the premium determines whether your benefit will be taxable. If you pay your part of the premium withpretax dollars, through a cafeteria or medical reimbursement plan, you'll owe income tax on any disability

benefit you receive that is related to that part of the premium. On the other hand, if you pay your part ofthe premium with after-tax dollars, you won't owe income tax on any disability benefit you receive that isrelated to that part of the premium.

Benefits under a cafeteria plan

An employer-sponsored cafeteria plan allows you to select among certain employee benefits, includinghealth, life, and disability insurance. You normally pay for these benefits on a pretax basis. Sometimes,however, your employer pays the premium for the benefits you choose (up to a certain amount), and ifyou choose additional benefits, you pay for extra coverage using either pretax or after-tax dollars.

If you pay your share of the premium with after-tax dollars, that portion of your disability benefits will beconsidered tax-free income; you'll be taxed only on the portion of the benefit related to your employer's

contribution. However, if you pay your share with pretax dollars, that portion of your disability benefits willbe considered taxable income, and you'll have to pay income tax on all of your benefit.

If you are totally and permanently disabled, and you receive fully or partially taxable disability benefitsfrom an employer-sponsored disability insurance plan, you may be eligible to claim a tax credit when youfile your annual income tax return.

Group association disability insurance



Disability policies purchased through an association are called group policies because members of theassociation are offered special terms, conditions, and rates based on the characteristics of that group.Association policies function much like individual policies and have similar tax consequences. If you paythe premiums for an association policy, the benefits you receive are tax free, but you cannot deduct thecost of the premiums.

Government disability insurance

All, part, or none of the disability benefits you receive through government disability insurance programsmay be taxable. How much of the benefit is taxable (and under what circumstances) depends on the typeof government disability benefit you are receiving:

Social Security benefits: If the only income you had during the year was Social Security disability income,your benefit usually isn't taxable. However, if your total income exceeds a certain base amount and youearned other income during the year (or had substantial investment income), then you might have to paytax on part of your benefit. More specifically, your Social Security benefit is taxable if your modifiedadjusted gross income plus one-half of your Social Security benefit exceeds the base amount for yourfiling status.

Medicare benefits: When you are disabled, you may be eligible to enroll in Medicare. If you pay premiumsfor the medical insurance portion of Medicare, you may deduct these premiums as a medical expense(provided, of course, that your medical expenses exceed 7.5 percent of your adjusted gross income). Inaddition, Medicare benefits you receive are not taxable.

Workers' compensation: Generally, if you receive a disability benefit from workers' compensation, thatbenefit won't be taxable. Any benefits paid to your survivors would also be tax exempt. However, incertain cases, you may be able to return to work and continue to receive payments. If this is the case,then your workers' compensation benefit would be taxable. Note, though, that if part of your workers'compensation benefit offsets (reduces) your Social Security benefit, then that part is considered to be aSocial Security benefit. It may then be taxable according to the rules governing Social Security.

Veterans benefits: Disability benefits you receive from the Department of Veterans Affairs, formerly knownas the Veterans Administration, are not taxable, except for certain payments for rehabilitative services.

Military benefits: Most military disability pensions are taxable. However, if you were disabled due to injuryor illness resulting from active service in the armed forces of any country, your disability benefits may betax free under certain conditions.

Federal employees retirement system (FERS) benefits: If you retire on disability, the payments underFERS that you receive from a pension or annuity are taxable as wages until you reach minimumretirement age. Beginning on the day after you reach minimum retirement age, payments you receive aretaxable as a pension.

Is it wiser to buy disability coverage with pretax or after-tax dollars?

If you pay for disability income insurance with pretax dollars, you are (in effect) reducing your taxable

income. This means that you won't have income taxes withheld on the portion of your income you used topay your disability income insurance premium. However, you also have to consider how your benefitwould be taxed if you ever begin receiving disability benefits. If you use pretax dollars to pay yourinsurance premium, then your benefit would be fully taxable. However, if you use after-tax dollars, yourbenefit won't be taxable.

It comes down to this: If you never use your disability benefits, you'll save money by paying yourpremiums with pretax dollars. But if you do use your disability benefits, using after-tax dollars to pay yourpremiums places you in a better position. Consult your tax professional for advice.



TAX PLANNING TIPS: LIFE INSURANCE

Understanding the importance of life insurance is one thing. Understanding the tax rules is quite another. Asinsurance products have evolved and become more sophisticated, the line separating insurance vehicles frominvestment vehicles has grown blurry. To differentiate between the two, a mix of complex rules and exceptions now

governs the taxation of insurance products. If you have neither the time nor the inclination to decipher the IRSregulations, here are some life insurance tax tips and background information to help you make sense of it all.

Life insurance contracts must meet IRS requirements

For federal income tax purposes, an insurance contract cannot be considered a life insurance contract--and qualifyfor favorable tax treatment--unless it meets state law requirements and satisfies the IRS's statutory definitions ofwhat is or is not a life insurance policy. The IRS considers the type of policy, date of issue, amount of the deathbenefit, and premiums paid. The IRS definitions are essentially tests to ensure that an insurance policy isn't really aninvestment vehicle. The insurance company must comply with these rules and enforce the provisions.

Keep in mind that you can't deduct your premiums on your federal income tax return

Because life insurance is considered a personal expense, you can't deduct the premiums you pay for life insurancecoverage.

Employer-paid life insurance may have a tax cost

The premium cost for the first $50,000 of life insurance coverage provided under an employer-provided group termlife insurance plan does not have to be reported as income and is not taxed to you. However, amounts in excess of$50,000 paid for by your employer will trigger a taxable income for the "economic value" of the coverage provided toyou.

You should determine whether your premiums were paid with pre- or after-tax dollars

The taxation of life insurance proceeds depends on several factors, including whether you paid your insurance

premiums with pre- or after-tax dollars. If you buy a life insurance policy on your own or through your employer, yourpremiums are probably paid with after-tax dollars.

Different rules may apply if your company offers the option to purchase life insurance through a qualified retirementplan and you make pretax contributions. Although pretax contributions offer certain income tax advantages, onetradeoff is that you'll be required to pay a small tax on the economic value of the "pure life insurance" in the policy(i.e., the difference between the cash value and the death benefit) each year. Also, at death, the amount of the policycash value that is paid as part of the death benefit is taxable income. These days, however, not many companiesoffer their employees the option to purchase life insurance through their qualified retirement plan.

Your life insurance beneficiary probably won't have to pay income tax on death benefit received

Whoever receives the death benefit from your insurance policy usually does not have to pay federal or state incometax on those proceeds. So, if you die owning a life insurance policy with a $500,000 death benefit, your beneficiaryunder the policy will generally not have to pay income tax on the receipt of the $500,000. This is generally trueregardless of whether you paid all of the premiums yourself, or whether your employer subsidized part or all of thepremiums under a group term insurance plan.

Different income tax rules may apply if the death benefit is paid in installments instead of as a lump sum. Theinterest portion (if any) of each installment is generally treated as taxable to the beneficiary at ordinary income rates,while the principal portion is tax free.

In some cases, insurance proceeds may be included in your taxable estate



If you hold any incidents of ownership in an insurance policy at the time of your death, the proceeds from thatinsurance policy will be included in your taxable estate. Incidents of ownership include the right to change thebeneficiary, the right to take out policy loans, and the right to surrender the policy for cash. Furthermore, if you giftaway an insurance policy within three years of your death, then the proceeds from that policy will be pulled back intoyour taxable estate. To avoid having the policy included in your taxable estate, someone other than you (e.g., abeneficiary or a trust) should be the owner. Caution: If the owner, the insured, and the beneficiary are three different

people, the payment of death benefit proceeds from a life insurance policy to the beneficiary may result in anunintended taxable gift from the owner to the beneficiary.

If your policy has a cash value component, that part will accumulate tax deferred

Unlike term life insurance policies, some life insurance policies (e.g., permanent life) have a cash value component.As the cash value grows, you may ultimately have more money in cash value than you paid in premiums. Generally,you are allowed to defer income taxes on those gains as long as you don't sell, withdraw from, or surrender thepolicy. If you do sell, surrender, or withdraw from the policy, the difference between what you get back and what youpaid in is taxed as ordinary income.

You usually aren't taxed on dividends paid

Some policies, known as participating policies, pay dividends. An insurance dividend is the amount of your premiumthat is paid back to you if your insurance company achieves lower mortality and expense costs than it expected.Dividends are paid out of the insurer's surplus earnings for the year. Regardless of whether you take them in cash,keep them on deposit with the insurer, or buy additional life insurance within the policy, they are considered a returnof premiums. As long as you don't get back more than you paid in, you are merely recouping your costs, and no taxis due. However, if you leave these dividends on deposit with your insurance company and they earn interest, theinterest you receive should be included as taxable interest income.

Watch out for cash withdrawals in excess of basis--they're taxable

If you withdraw cash from a cash value life insurance policy, the amount of withdrawals up to your basis in the policywill be tax free. Generally, your basis is the amount of premiums you have paid into the policy less any dividends orwithdrawals you have previously taken. Any withdrawals in excess of your basis (gain) will be taxed as ordinaryincome. However, if the policy is classified as a modified endowment contract (MEC) (a situation that occurs whenyou put in more premiums than the threshold allows), then the gain must be withdrawn first and taxed.

Keep in mind that if you withdraw part of your cash value, the death benefit available to your survivors will bereduced.

You probably won't have to pay taxes on loans taken against your policy

If you take out a loan against the cash value of your insurance policy, the amount of the loan is not taxable (except inthe case of an MEC). This result is the case even if the loan is larger than the amount of the premiums you havepaid in. Such a loan is not taxed as long as the policy is in force.

If you take out a loan against your policy, the death benefit and cash value of the policy will be reduced.

You can't deduct interest you've paid on policy loans

The interest you pay on any loans taken out against the cash value of your life insurance is not tax deductible.Certain loans on business-owned policies are an exception to this rule.

The surrender of your policy may result in taxable gain

If you surrender your cash value life insurance policy, any gain on the policy will be subject to federal (and possibly



state) income tax. The gain on the surrender of a cash value policy is the difference between the gross cash valuepaid out (plus any loans outstanding) and your basis in the policy. Your basis is the total premiums that you paid incash, minus any policy dividends and tax-free withdrawals that you made.

You may be able to exchange one policy for another without triggering tax liability

The tax code allows you to exchange one life insurance policy for another (or a life insurance policy for an annuity)without triggering current tax liability. This is known as a Section 1035 exchange. However, you must follow theIRS's rules when making the exchange.

When in doubt, consult a professional

The tax rules surrounding life insurance are obviously complex and are subject to change. For more information,contact a qualified insurance professional, attorney, or accountant.



TAX TIPS: HOMEOWNERS INSURANCE

The purpose of home insurance is obvious. The tax rules surrounding home insurance, though, aren't always soclear. For example, if your insurance won't cover you for a given loss, are you simply left holding the bag, or can youexpect some tax relief? And what about premiums--can you deduct them or not? Here are some tax tips to help you

make sense of it all.

If your home or possessions are damaged, destroyed, or stolen, you may get a tax deduction

If you suffer a home-related loss, begin by reading your homeowners policy carefully to find out what is and isn'tcovered. Section 1 of your policy explains the types of property coverages, lists the specific perils that you're insuredagainst (e.g., damage caused by fire, theft, and hail), describes the exclusions from coverage (e.g., damage causedby a flood or earthquake), and details any conditions that you must meet for coverage to apply.

In many cases, your homeowners insurance will reimburse you for your loss. Sometimes, though, you'll be onlypartially reimbursed or not compensated at all. In such cases, you may be entitled to some tax relief.

If your home is damaged or destroyed in an accident or by an act of nature (e.g., windstorm, lightning), and your

homeowners insurance does not completely reimburse you for the loss, you may be able to claim a casualty loss taxdeduction on your federal income tax return. (A casualty is the damage, destruction, or loss of property resultingfrom an identifiable event that is sudden, unexpected, or unusual.) In addition, if your personal possessions arestolen, damaged, or destroyed, you may be able to claim a theft or casualty loss tax deduction if you're not fullyreimbursed for your loss.

How does the theft or casualty loss deduction work?

You must file federal Form 1040 and itemize your deductions on Schedule A to claim a casualty or theft lossdeduction. For individual taxpayers, the casualty or theft deduction is subject to two limitations. First, you can'tdeduct the first $100 of any loss. So, if your $99 watch was stolen from your bedroom and nothing else was taken,you're out of luck (at least in terms of a deduction). Second, even if your loss exceeds $100, you can only deductcasualty and theft losses if the total amount you lost in the year (after the $100 per casualty threshold) exceeds 10percent of your adjusted gross income (AGI).

If you're reimbursed for your loss by your insurer, you must subtract this reimbursement amount when calculatingyour loss for tax purposes. In other words, you do not have a casualty or theft loss to the extent you are reimbursed.Also, keep in mind that if you do suffer a property loss and the property is covered by insurance, you should file atimely insurance claim. Otherwise, you may not be able to deduct your loss.

Calculating the amount of your loss

If you suffer a personal (as opposed to business) property loss, the amount of your loss is the smaller of (1) thedecrease in the fair market value (FMV) of the property as a result of the loss or (2) your adjusted basis in theproperty before the loss. (Adjusted basis is usually your cost, increased or decreased by various events.) Afterdetermining the smaller figure, you subtract any insurance reimbursements.

For example, assume a fire severely damaged your home. You had bought the house for $50,000 (adjusted basis) afew years ago, and it was appraised at $75,000 before the fire. It was worth only $15,000 after the fire. Yourinsurance company paid you $45,000 for the loss. Here's what you do:

1. Adjusted basis in the property before the loss: $50,000

2. Decrease in property's FMV: $60,000 ($75,000 minus $15,000)

3. Loss: $50,000 (smaller of 1 or 2, above)

4. Subtract insurance reimbursement of $45,000



5. Amount of loss: $5,000

Finally, you'd apply the two deduction limitations ($100 deductible; 10 percent of AGI) to determine the amount ofyour casualty loss deduction.

In general, you'll use Form 4684 to figure the amount of your deduction; consult a tax professional if you need help.

IRS Publication 584 can also provide you with additional information.

What about insurance deductibles?

With most homeowners insurance policies, you must pay a deductible before the insurer will reimburse you (partiallyor fully) for your loss. So, if you have a policy with a $500 deductible and you suffer a theft loss, you'll have to coverthe first $500 of your loss out of pocket. It's possible, though, that you'll be able to write off this deductible as a theftloss on your federal tax return (subject to the $100 and 10 percent rules).

Can you normally deduct your homeowners insurance premiums on your tax return?

If you're like most people and use your home only for personal purposes, you can't deduct your homeownersinsurance premiums on your tax return.

Deducting your homeowners insurance premiums when you have a home office

If you have a home office and qualify to take a home office deduction, you may be able to deduct some of yourhousing expenses, including part of your homeowners insurance premiums, on your federal income tax return. Aspecial formula is used to determine which portion of your housing expenses may be traced or allocated to yourhome office, and you'll be able to deduct the same percentage of your homeowners insurance premiums. Forexample, if you can allocate 15 percent of your housing expenses to your home office, you'll be able to deduct 15percent of your premiums.

If you have a home-based business, though, you should consider purchasing additional insurance. A standardhomeowners policy typically won't provide coverage for your business equipment in the home, and it won't coverbusiness-related personal liability losses at all (including the delivery person who slips and falls). You may be able toadd an endorsement to your existing homeowners policy, buy a home-based business package policy, or buyindividual business insurance. Those insurance premiums would then be fully deductible against business income.



If I work at home occasionally, am I entitled to a home office deduction?Answer:

To qualify for an income tax deduction for home office expenses, the IRS requires that you meet two tests--the place of business test and the exclusive and regular use test.

To pass the place of business test, you must show that you use a portion of your home as:

The principal place for any trade or business you conduct, including administrative use. The IRSuses a two-part test to determine if a home office is a taxpayer's principal place of business. Thetest takes into account the relative importance of business activities performed at each businesslocation and the amount of time spent conducting those activities at each place of business.A place where you meet clients or customers in the normal course of business.In the case of a separate structure that is not attached to your dwelling unit, you must show thatyou use it in connection with your trade or business (i.e., it needn't be your principal place ofbusiness).

The exclusive and regular use test requires that you use that portion of your home both exclusively forbusiness and on a regular basis.

Depending on the nature of your work, your occasional home use is unlikely to qualify for a home officededuction since it is doubtful you would meet the first test (because occasional implies it isn't your principalplace of business). You are also unlikely to satisfy the second test (because occasional implies that the useof your home isn't exclusive or regular).

Because the rules are complicated, it might be wise to review IRS Publication 587, titled Business Use ofYour Home, or consult a tax professional.



We just bought our first home. What can we deduct from the settlementstatement?Answer:

If you took out a mortgage to purchase your home, you probably paid settlement costs in addition to thecontract price. These costs generally include points, attorney's fees, recording fees, title search fees,

appraisal fees, and other loan or document preparation and processing fees. The only settlement costs youcan deduct are home mortgage interest and certain real estate taxes. You deduct them in the year youbought the home if you itemize your deductions. Certain settlement costs can be added to the basis of yourhome. Other settlement or closing costs, however, cannot be deducted or added to the basis.

If the loan was for the purchase of your primary residence, the points withheld from the loan proceeds willgenerally be deductible as up-front interest if you paid a down payment, escrow deposit, or earnest moneyequal to the charge for points. Generally, you can also deduct any points paid by the seller. Real estatetaxes are usually divided so that you and the seller each pay taxes for the part of the property tax year thateach owned the home. You can deduct the taxes you actually paid during the year. However, you cannottake a present deduction for taxes paid in escrow for a future tax bill.

Other closing costs that you paid are not deductible and must be added to the cost basis of your home. Youcan include in your basis the settlement fees and closing costs that you paid that are associated with buying

your home. You cannot include in your basis the fees and costs associated



Is student loan interest deductible?Answer:

Under legislation passed in 1997, you may be able to deduct all or part of the student loan interest you'vepaid during the year, assuming you meet the requirements. You may be able to deduct up to $2,500 eachyear from your gross income if you've paid interest on a qualified education loan for qualified higher

education expenses during the year.

To be eligible for the deduction, your modified adjusted gross income (MAGI) must fall below a thresholdfigure. In 2005, the deduction begins to phase out as your MAGI exceeds $50,000 if you're single or$105,000 if you're married and file jointly. It phases out completely when your MAGI exceeds $65,000($135,000 for married persons filing jointly). These amounts are indexed for inflation. No deduction isallowed if your filing status is married filing separately.

Generally, a qualified education loan is a debt you incur to pay qualified higher education (undergraduateand graduate) expenses for yourself, your spouse, or a dependent at an eligible educational institution in aprogram that leads to a degree. The IRS provides specific requirements regarding the definitions of both aneligible educational institution and qualified higher education expenses. To qualify for the deduction, youmust have been enrolled in the institution at least half-time at the time of the loan.

If you are claimed as a dependent, you may not take the deduction. If you are a dependent and your parentborrows money to pay for your college tuition, he or she may claim the student loan interest deduction.

For additional details, see IRS Publication 970 and/or consult a tax professional.



Can I deduct the cost of improvements or repairs I've made to my home?Answer:

Generally speaking, you can deduct neither the cost of improvements nor the cost of repairs you've made to yourprincipal residence. (However, improvements to your home for necessary medical care may be deducted as a

medical expense, if all requirements are met.) Although the improvements cannot be deducted, they do increase thebasis of your home.

Home improvements add to the value of your home, prolong its useful life, or adapt it to new uses. Examples ofimprovements include the following:

Paving a drivewayPaneling a denPutting up a fenceAdding a bathroom

You should add the cost of improvements to the basis of your property. Your initial basis is usually the cost of yourproperty (what you paid for it originally). Improvements increase your basis. If you sell your home in the future,improvements could lower your tax bite because any gain realized is reduced by additions to the basis of yourproperty.

Repairs are different from improvements; repairs keep your home in good operating condition. They do not materiallyadd to its value or substantially prolong its life, and you do not add their cost to the basis of your property. Examplesof repairs include the following:

Repainting your house (inside or out)Fixing your guttersReplacing broken window panes

Note: An entire repair job may be considered an improvement if items that would otherwise be considered repairsare done as part of extensive remodeling or restoration of your home.



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