Tuesday, December 29, 2009

Deductibility of Home Improvements & Home Repairs

Q Can I take a tax deduction for home repairs or home improvements?

A Generally, you cannot deduct home repairs or home improvements on your tax return in the current tax year.

Home improvements add to the value of your home, prolong its useful life, or adapt it to new uses. You add the cost of home improvements to the tax basis of your property, the amount you “have in” your home including purchase price, non-deductible closing costs, and improvements.

“Basis” is the amount you subtract from the home’s selling price to determine how much profit (or loss) you realize on the sale of the home.

Examples of home improvements include putting a recreation room in your unfinished basement, adding another bathroom, or bedroom, putting up a fence, putting in new plumbing or wiring, putting on a new roof, or paving your driveway.

Home repairs maintain your home in good condition. They do not add to its value or prolong its life, and you do not add their cost to the tax basis of your property. Nor can you deduct home repairs on your tax return.

Some examples of home repairs include repainting your house inside or outside, fixing your gutters or floors, repairing leaks or plastering and replacing broken window panes.
The entire job is considered a home improvement, however, if items that would otherwise be considered home repairs are done as part of extensive remodeling or restoration of your home.

One exception is if you are using a portion of your home for a home office. In that case, repairs and improvements specific to the home office space are deductible.

Unemployment Compensation

Q I received Unemployment Compensation this year. Do I have to pay income tax on that money?

A For 2009, you must include in income all unemployment compensation you received that is more than $2,400. You should receive a Form 1099-G showing in box 1 the total unemployment compensation paid to you in 2009. You must subtract $2,400 from that amount to figure how much of your unemployment compensation is taxable and must be reported on your 2009 Federal Income Tax Return. Do not enter less than zero.

If married filing jointly, also include any unemployment compensation received by your spouse that is more than $2,400.

You can choose to have federal income tax withheld from your unemployment compensation. To make this choice, contact your local Unemployment Office. Tax will be withheld at 10% of your payment.

If you do not choose to have tax withheld from your unemployment compensation, you may be liable for estimated tax. If you do not pay enough tax, either through withholding or estimated tax, or a combination of both, you may have to pay a penalty.

Alimony & Child Support

Q Do I have to pay income tax on alimony and child support payments I receive?

A Alimony received is generally taxable income on the recipient's tax return in the tax year it is received; and, generally, your spouse or former spouse may deduct alimony paid on his or her tax return in the tax year paid. If the payments are tax deductible to your former spouse on his/her tax return, then they are taxable to you on your tax return.

Alimony is an amount paid by a person to a spouse or former spouse under a divorce or separation agreement. Alimony does not include child support payments or property settlement amounts.

You may state in your divorce decree that alimony is neither taxable to you on your tax return nor tax deductible by your former spouse on his/her tax return; however, this must be included in the decree.

The taxable amount is reported on Form 1040, line 11. You cannot use Form 1040A or Form 1040EZ.

Child support is never deductible by the payer and is never taxable to the recipient. You don't have to report child support payments received on your tax return. If your divorce decree or separate maintenance provides for alimony and child support, and you pay or receive less than the total required, the payments apply first to child support. Any remaining amount is considered alimony.

Any alimony payments that include an element of child support payments are not taxable on your tax return as to the child support payments element. If tax deductible alimony payments include an element of child support payments and partial payments are made, the payments must be credited first to the non tax deductible child support payments.