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You own a home and are thinking of doing some home repairs
You own a home and are thinking of doing some home repairs. This year there is a tax credit of one-fifth the cost of materials for adding insulation and for replacing windows and external doors, up to a $4,000 tax credit maximum.
a. You decide to add insulation to your attic which costs $2,800 in materials, and you install it yourself. What is the dollar amount of the tax credit?
b. You are in a 28% tax bracket. How much does the home-repair tax credit reduce your tax liability?
c. How much would you have to spend on qualified improvement materials to maximize your $4,000 tax credit?
Expert Solution
A: $560
The dollar amount of the tax credit is one-fifth is cost of the materials for insulation which is $2,800*0.2=$560.
B: $560
A tax credit lowers your tax liability by the same amount regardless of your income or tax bracket. This is because it is a tax credit not tax deduction.
C:$20,000
You would need to spend $4000/0.2=$20,000 to maximize your tax credit since you only get tax credits for one-fifth of the cost paid.
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