A home security system keeps you and your family safe but is generally not fully deductible. Whether you can deduct your home security system depends on if you use a portion of your home for business purposes.
We’re all trying to save a dollar where we can, so you may wonder, “Is my home security system tax-deductible?” It’s a good question, but, unfortunately, the answer is no in most cases. There are, however, a few exceptions in which you can take a tax deduction for installing and monitoring a home security system.
While you can often get a discount on your homeowner’s insurance when you buy a home security system, most people won’t be able to deduct their home security system from their taxes.
Here’s what you need to know about home security systems and tax deductions, as well as other ways to save when it comes to keeping your home safe.
When a Home Security System Is Tax-Deductible
According to the Internal Revenue Service (IRS), the cost of a home security system can’t be deducted as a personal expense. You may be able to remove it, however, if you have a home office that qualifies as such under IRS guidelines. Of course, there are some exceptions.
Home Use Vs. Business Use:
If you use your home for business, you may be able to deduct your home security system. However, this only applies if your home is the principal place of business, so it doesn’t apply to remote employees of larger organizations.
Your home needs to be the prominent place where you meet and deal with customers, clients, or patients (detached structures on your property count as well).
The security system must cover all of the doors and windows in your home, and you can only deduct the part of the system covering your place of business.
You can also remove any expenses you incurred to monitor or maintain the system. Most people will make a depreciation deduction for the cost of the security system relating to their office or where they do business exclusively.
If you rent a home to do business in, you can deduct the cost of the security system you use there. Again, this rental needs to be your primary place of business. Learn more about the best home security systems for renters.
Some people work on their properties but in detached buildings like garages (or, if you’re like us, a garage with a bright door that you can control remotely). If that’s the case, you can deduct expenses related to its furnishings and structure, given you use it exclusively and regularly for your business.
If you use part of your home, rental, or detached structure exclusively and regularly for business, you’ll be able to deduct your home security system, but only partially.
For example, if you have a security system installed throughout your home, including your office, you can only deduct the equipment, monitoring, and maintenance in your office as a percentage of your entire house.
You can calculate this percentage by either comparing your office’s square footage to your home’s total square footage or counting the rooms. Read on to learn about the best home security system for your home office.
Deduct Home Improvements from Income Taxes
You can't deduct home improvements from income taxes immediately except under a few specific particular circumstances. However, it may be possible to get a tax benefit from your home improvements later on - at the time you sell your home.
What Is Home Improvement?
For tax purposes, a home improvement is anything that increases the value of your home. Basic repairs such as patching a leaky roof don't qualify. However, if you replaced your existing roof with a different and higher-quality type of roof, that would likely increase the value of your home and therefore count as a home improvement.
Tax Benefits of General Home Improvements
General-purpose home improvements can't be deducted from your tax return. However, you do benefit from the way these home improvements increase the value of your house. Any home improvements you make are added to your 'tax basis' in the place.
Tax basis refers to how much you have invested in something, and it's used to figure out your gain later on. When you sell your house, you will subtract your tax basis from the selling price to calculate your income.
Gain is subject to tax, so by increasing your tax basis through home improvements, you're reducing the amount of tax you pay at the time of sale.
Medical Home Improvements
If the purpose of a home improvement is to provide medical care for you, your spouse, or one or more of your dependents, it qualifies as a medical home improvement. Medical home improvements can be deducted when they are made, but only to the extent that they don't increase the value of your home.
The IRS reasons that you'll get the tax benefit from the increase in value when you sell the house, so they don't want to give you what would amount to a double deduction.
If you were to replace all your door knobs with lever-style handles because your arthritis makes it difficult for you to manage round knobs, you could likely deduct the entire cost since that wouldn't affect the value of your house.
However, if you installed an elevator for the benefit of your spouse who uses a wheelchair, the value of your home would rise significantly. You could only deduct the difference between the change in your house's value and the total cost of the improvement.
The other hitch with medical home improvements is that, like all medical deductions, you can only take them if you choose to itemize deductions on your return. Worse, they're subject to a 10% adjusted gross income (AGI floor). This means that you have to subtract 10% of your adjusted gross income for the year from the sum of your medical deductions and then claim only the remainder as a deduction on your tax return.
Energy-Efficient Home Improvements
You can't deduct home improvements that increase your home's energy efficiency, but you can do something even better: get a tax credit. Credits are subtracted from your tax liability for the year, whereas deductions are removed from your taxable income to calculate the tax liability. Thus, credits can save you a lot more money on your taxes than deductions.
The Residential Energy Efficient Property Credit allows you to claim a tax credit of 30% of the cost of solar water heaters, solar electricity-generating equipment, and other qualified alternative energy equipment. The credit for solar-type equipment has been extended at least through 2021. Sadly, the different types of energy tax credits have now expired.
Home Office Improvements
If you have a home office that qualifies for the home office deduction, you can deduct the cost of any improvements you make to the home office as a business expense. Home improvements that affect your entire house can be partially deducted as a business expense, based on the size of your home office. For example:
- If you use your spare bedroom exclusively as a home office and have an external door installed so that clients can walk straight into your office, you can deduct 100% of the cost of the new entry.
- If you have your laminate flooring replaced with hardwood flooring throughout the house and your home office takes up 25% of the total square footage of the house, you can deduct 25% of the cost of the new flooring.
Keep in mind that you may not be able to deduct the total cost all at once. Capital improvements, meaning improvements with benefits that last for more than one year, are typically depreciated, and the deduction is split out over several years.
Home Improvement Loan Interest
If you take out a home improvement loan or use a home equity line of credit (HELOC) to pay for home improvements, the interest on the loan or line of credit is deductible. Note that the money from the loan or HELOC must be spent on home improvements and not just home repairs to qualify for the interest deduction. Points and other closing fees on loans are also deductible.
Claiming Your Home Improvement Deductions
If you qualify for one of the exceptional circumstances listed above, you'll need to claim your deduction(s) on your tax return. Medical home improvements are deducted as an itemized expense, so you'd need to itemize deductions instead of claiming the standard deduction to benefit. Itemized deductions go on Schedule A of Form 1040. The home office deduction, including any related home improvements, goes on Form 8829. Like medical home improvements, the interest on a home improvement loan or HELOC is an itemized deduction, but happily, this particular deduction is not subject to the AGI floor.
Does Owning Rental Property Help You on Your Taxes?
Does owning rental property help you with your taxes? The answer depends on several factors, including whether you have mortgages on the rental properties or own them outright.
What the IRS Says
You will have to itemize your taxes to derive benefits from owning a home, whether you rent the house out to tenants or live in it yourself. The best source for information regarding itemized tax returns and other tax-related issues specific to your situation should be directed to a competent tax professional.
The Internal Revenue Service explains how rental income should be reported regarding your taxes on its informative website. Essential things to take into consideration with regards to rental income and taxes include:
- The rent you receive from tenants is considered income.
- If a tenant makes improvements on the property and does not charge you for these improvements, the value of these improvements is considered income.
- Security deposits that will not eventually be returned to the tenants are considered income.
Landlords must take care to keep accurate records of all transactions associated with rental payments and other transactions. Regardless of if the income helps or hurts your taxes, the IRS demands accuracy in reporting any rental income from a property.
Checklist of Records to Gather Before You Do Your Taxes
Before preparing your next tax return on your own or with professional help, you must gather certain documents to facilitate the process. While some will arrive via mail, other records will need to be generated using data collected in the previous calendar year.
Use this printable checklist to guide you while gathering all the documents needed to prepare your tax return. The documents mentioned are separated by category, and you might organize the hard copies in the same manner, to locate them promptly.
For the Internal Revenue Service (IRS) to confirm your identity, it is necessary to provide the full name and date of birth for both you and your spouse (if filing jointly). You will also need to include Social Security numbers.
It is also ideal to have a copy of last year's return on hand so the preparer can become acclimated with your unique tax situation. Likewise, you may be asked to provide the prior year's Adjusted Gross Income (AGI) if you prepare and submit your return electronically using the software.
Finally, the IRS needs your routing and checking account information to determine where your refund, if applicable, should be deposited.
Include the full name, date of birth, and Social Security numbers of dependents you plan to claim. Also, childcare records are required if you qualify and plan to take the accompanying tax credit, which will lower your tax liability or increase the refund amount.
You will need to gather any documentation that reflects the income earned from your employer, typically displayed in Form W-2.
In addition, you'll need any Form 1099s income along with proceeds from alimony, jury duty, or any other miscellaneous income.
Retirement Income and Contributions
If you made contributions to an Individual Retirement Account (IRA), be sure to gather those records for your tax preparer. Also, you'll need to include any income reflected on Form 1099-R, RRB-1099, or any other document that confirms contributions.
Business Income and Expenses
Any records that document business-related income and expenses need to be on hand when it's time to file. Additionally, gather records that reflect inventory, depreciable assets, rental property income and expenses, health insurance premiums, and estimated tax payments. This documentation will enable the tax preparer to compute your company's taxable income accurately, along with the aggregate expenses you can use to offset this figure.
Forms 1098-T and E include amounts paid for tuition that can reduce your taxable income and tax liability. It would be best if you also had receipts for any out-of-pocket expenses, along with scholarship and fellowship records.
If you're a homeowner, be sure to gather records for any property taxes and qualified energy-efficient home improvement expenses. Doing so helps determine if it would be of more significant benefit for you to itemize deductions.
Self-employed individuals can claim mileage instead of gasoline expenses to offset business income. You can also include commuting expenses, such as parking and tolls.
Other Deductions and Credits
There are many additional tax deductions and credits available to help reduce your taxable income and liability, which often results in a larger refund. As a result, you will need to provide documentation for any of the following expense types applicable to you:
- Disaster-related expenses
- Casualty and theft loss
- Adoption expenses
- Out-of-pocket medical expenses
- Medical Savings Account (MSA) contributions
- Charitable contributions
- Investment interest expenses
- Moving expenses
Using the Tax Record Checklist
By using the printable tax record checklist to gather necessary documentation, you will save yourself a ton of time and frustration encountered when searching for missing forms needed to prepare your return.
Tips for Preparing for Your Tax Appointment
When tax season rolls around, will you be prepared or among the scores of disorganized individuals scrambling to beat the filing deadline? To avoid falling into the latter category, get organized for the upcoming tax season. You can download the printable checklist below; click on the image to download and print the pdf. This guide can give you further help if you need it.
The annual tax deadline falls around mid-April each year, so don't wait until the last minute to schedule an appointment. Instead, call when tax season starts to secure your spot and avoid the last-minute rush, which sometimes results in more exorbitant preparation fees or sheer oversight from mentally fatigued preparers. If appointments tend to fill up fast, which is typical for preparers in high demand, you risk having to take your business elsewhere shortly before the filing deadline.
Once you have made an appointment with a reputable tax preparer, it is time to get organized. Unsure of where to start? By all means, avoid piling all your receipts and tax-related documentation into a shoebox and heading to the preparer's office. These messes take more to sort out, which equates to more billable hours and money out of your pocket. If you bring in the shoe box, your tax fees will escalate.
A better alternative is to dump out the shoebox(es), sort the documents by type, arrange by date and neatly file them away. That way, you will access any forms or documentation requested by the tax preparer on demand. (Plus, they won't grow irritated at your lack of organization or unwillingness to prepare). Even more importantly, you will not risk missing out on deductions that could lower your taxable income or credits that could reduce your total tax liability due to misplaced paperwork.
Unsure of where to start? Here are the most common types of documents your tax preparer will need:
- Vehicle expenses
- Charitable contributions
Once the documents have been sorted, please place them in labelled folders corresponding to the categories mentioned above. Maintaining this filing system as we advance will prevent the papers from piling up before subsequent tax seasons.
Gather Any Missing Documentation
Your tax preparer should have provided you with a list of documents needed to complete your return in the most accurate and timely manner possible. You can also view this comprehensive checklist for additional guidance. If anything mentioned on the list is not in your organized file of tax documents, be sure to collect it before the appointment, or there's a strong possibility the filing of your return will be delayed.
Submit Your Records
Upon organizing your files and referencing the tax record checklist mentioned above to confirm you have all the essential documents on hand, follow the procedures given by your tax preparer to submit your files.
A Final Thought
By planning and using the printable checklist, you will help simplify the tax preparation process and avoid the last-minute rush of taxpayers. In addition, it leaves an ample amount of time to discuss other pertinent tax matters that could yield cost savings in the current and forthcoming years.