Jonathan Clements's Blog, page 18
September 12, 2025
Home Improvements Tax Tips
The average homeowner currently has $313,000 of equity, according to the Mortgage Monitor report.
While that number is likely skewed, we all can agree that many homeowners are sitting on large equity.
And, there likely will come a time when you have to sell your home to either move elsewhere, upgrade, or downgrade. With such large equity also comes another problem - capital gains tax.
Luckily, if you sell your primary home, you may be able to exclude up to $250,000 (or $500,000 for married filing jointly) of the gain from taxes if you meet the ownership test (own the home for at least 2 out of the 5 years) and residence (must have used the home as main residence for at least 24 months during the 5 year period).
But, in some cases, that’s not enough.
It’s not uncommon to see homes in my area (midwest) that were sold for $250,000 in the 1990s and are worth around $750,000 now. In other “hotter” areas, that appreciation is even steeper.
This brings me to my main point of this newsletter - home improvements.
Most of the stuff you buy for your house is not deductible. You can’t get any tax deductions.
But there are some improvements that you can do that will increase the home’s basis.
This means that when you eventually sell the home, you could pay less capital gains tax. Let me give you an example of before and after with improvements tracking:
Before:
Say a taxpayer bought a house for $250,000 (cost basis). Sold for $750,000 (assume no closing costs for simplicity), and is single.
Total proceeds: $750,000
Cost basis: $250,000
Capital gains exclusion: $250,000
Capital gains tax: $750,000 - $500,000 = $250,000
After:
Say a taxpayer bought a house for $250,000 (cost basis). Sold for $750,000 (assume no closing costs for simplicity), and is single. Over the course of him having this house, he also did $100,000 of improvements that he tracked.
Total proceeds: $750,000
Cost basis: $350,000
Capital gains exclusion: $250,000
Capital gains tax: $750,000 - $500,000 = $150,000
The taxpayer can save thousands of dollars by tracking these improvements.
What is an improvement?
Improvements add to the value of your home. They prolong the useful life of your home.
As such, you can add the cost of additions and improvements to the basis of your property.
In Publication 523, here are some examples of improvements that increase basis:
Additions (bedroom, bathroom, deck, garage, porch, patio)
Lawn & grounds (landscaping, driveway, walkway, fence, retaining wall, swimming pool)
Exterior (new roof, new siding, storm windows/doors, satellite dish)
Insulation (attic, walls, floors, pipes and duct work)
Systems (heating, central air, furnace, duct work, central humidifier, air/water filtration system, wiring upgrades, security system, lawn sprinkler system)
Plumbing (septic system, water heater, soft water system, filtration system)
Interior (built-in appliances, kitchen modernization, flooring, wall-to-wall carpeting, fireplace)
Some of these categories are certainly broad.
“Kitchen modernization” is an interesting one. Buying a new refrigerator wouldn’t count as kitchen modernization, but replacing entire cabinets and countertops as part of a larger project might qualify.
To give some practical examples, here are some things that would qualify:
Putting an addition on your home
Replacing an entire roof
Paving your driveway
Installing central AC
Rewiring your home
Let’s also cover what you CAN’t include as improvements:
Any costs of repairs or maintenance that are necessary to keep your home in a good condition but don’t add to its value or prolong its life (painting, fixing leaks, filing holes or cracks)
Any costs that are improvements but no longer part of your home
Any costs of improvements with a life expectancy of less than 1 year.
Basically, anything that’s cosmetic in nature and is a repair wouldn’t qualify.
Important exception - you can include repair-type work if it is done as part of an extensive remodeling or restoration job. For example, replacing broken windowpanes is a repair, but replacing the same window as part of a project to replace all the windows in your home counts as an improvement. Also, check your state rules for capital gains, as exclusions and basis adjustments may differ.
Some improvements may also qualify for tax credits, not just basis increases. In particular, solar panels and energy-efficient window upgrades, though many of these credits are being phased out soon under the OBBBA.
Records
It’s important to keep records to document the property’s adjusted basis.
Any time you buy real estate, you should keep records to document the property's adjusted basis.
Any time you sell real estate, keep all of the records generally until 3 years after the due date for your tax return for the year in which you sold your home.
For all home improvements, I suggest keeping the following records:
Contractor invoices/proposals
Payments (either credit card statements, or bank account statements).
Receipts. If you are dealing with a more established contractor, that shouldn’t be an issue. If paid via cash, ask if you can get some sort of receipt
You can also create a quick spreadsheet with amounts, dates, and descriptions. Include links to a cloud portal where you can store these documents. Just make sure to keep it secured and enable 2FA.
Tracking and documenting home improvements can save you tens of thousands in capital gains taxes when you sell your home. Even small improvements, when tracked over time, can make a big difference in your tax bill.
Bogdan Sheremeta is a licensed CPA based in Illinois with experience at Deloitte and a Fortune 200 multinational. He shares insights on taxes and personal finance through his newsletter, helping thousands of readers to make smarter financial decisions. He has over 140,000 followers on X and 110,000 on Instagram.The post Home Improvements Tax Tips appeared first on HumbleDollar.
Peter Mallouk posts podcast #78 of Down the Middle
Thank you Peter for posting on August 29, 2025
Looking Back on Jonathan Clements’ Best MomentsThe post Peter Mallouk posts podcast #78 of Down the Middle appeared first on HumbleDollar.
Retired Investor vs Beginner Investor
I'm someone who's been investing for almost 8 years and am early in my life and investing journey. I have only experienced the 2020 drop, along with the April 2025 drop. Of course, both were short-lived and I continued sticking to my investment plan.
A lot of HD forum members have been through more downturn seasons. How did you deal with that? Did you "automate" your investment (a relatively new concept) and delete any phone/web apps to "trick" your emotions?
Were there any regrets that you wish you would've done differently in your investing journey if you could go back to your 20s and 30s?
Please share your story. Would love to learn more!
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My Two Handicaps
I play a bit of golf - thankfully I'm not a fanatic about it, I had a game this morning. It's definitely an enjoyable way to waste a few hours, have a good dander and a bit of craic, as you would say in my neck of the woods.
I'm not brilliant at it, and it doesn't really bother me. I still get around the course eventually, and a 27 handicap is grand by me. Some of my mates and fellow players have a completely different approach, always trying to reach that fabled land of scratch golfing - the holy grail for most amateurs.
There's only one bit of the handicap system that interests me. Strangely enough, it has nothing to do with golf but just the idea itself. Having a 27 handicap means, on average, it takes me 1.5 shots more to finish each hole than a scratch golfer. No bother.
Where this becomes important for me is with my investment portfolio. I want to be at scratch with this because scratch means the average shots played for a course, and that's exactly what I'm after from my portfolio - the market's average returns, nothing less and nothing more. I simply want average.
My portfolio is a tool to give me security and growth; golf is just a game. People put enormous effort into becoming average at golf, which, by the way, is extremely difficult. The thing is, with your portfolio, it's extremely easy to be average. Simply buy a broad market global index fund and you're shooting scratch without any effort or expensive kit.
I find the irony brilliant. In golf, average performance takes extraordinary effort and skill. In investing, average performance takes extraordinary discipline and restraint. Most investors handicap themselves by trying too hard - chasing hot stocks, timing the market, paying hefty fees to active managers who mostly underperform.
They're essentially choosing to play off a higher handicap when scratch is sitting right there, available for the price of a simple index fund. Golf is for the craic, so who cares about the score? Money is for security, so why complicate what should be straightforward?
If you ever happen to play a links course in Ireland, maybe the fella wandering around the fairways with a smile on his face might just be me - a scratch player, not in golf, but in the game of finance, without a care in the world, knowing his portfolio is working away being average to pay for his next round.
Happy golfing!
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Being poor, even low income in retirement is no fun and society makes it more difficult
There is a world of reality beyond the HD community.
The Census Bureau reports that poverty among adults at least 65 years old rose in 2024 from the prior year. The poverty rate rose from 14.2% to 15%, the highest level among all age groups.
The 2026 COLA is projected between 2.7 and 2.9% (even though there is no inflation🙄) while the Medicare Part B premium is projected to increase $21.50 plus higher Part D premiums and higher supplemental coverage premiums. Lower income seniors may find themselves going backwards.
The reality is that if you are low income all your life, you are not likely to be better off in retirement. There are just some people, perhaps those up to the 20th percentile of income, who can’t save for retirement. The current poverty level for a family of two is $21,150 ($1762.50 mo). Two years ago 20% of American households earned less than $33,000.
Even though some seniors may be eligible for subsidies such as SNAP, that may not help the the near poor. In NJ the net income limit is $1,704 per month for two people plus there are liquid asset limits as well. Gross income can be higher as the cost of housing can be deducted to reach net income.
There are several programs to help low income with Medicare premiums and deductibles, but they vary by state.
Some seniors are dual eligible, that is, they have both Medicaid and Medicare. In NJ the income limit for a single person is $1,305 per month. This program is for those who need help with daily living activities but do not require a nursing home level of care. There is also a liquid asset limit of $4,000.
Two things that I find unfair. First, there are so many differences in how low income people are helped based only on where they live. Second, the complexity and differences in qualifying for different programs providing assistance to essentially the same population - in this case seniors 65 and up.
Being poor is no fun, being poor, even low income in retirement is less funner😢 There is a lesson for those with resources to save for retirement- get to it now and never stop.
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September 11, 2025
Tips, not TIPS
The OBBBA includes new code 224, a deduction for tax years 2025-2028, for up to $25,000 in qualified tips received during the year for cash tips received by an individual in an occupation that customarily and regularly received tips before 2024. That code section also includes subsection 224(d)(2)(B) which provides that tips do not qualify for the deduction if they are received in the course of certain specified trades or businesses -- including the fields of health, performing arts, and athletics.
The Treasury Department posted on its website in early September 2025 a preliminary list of occupations that customarily and regularly received tips on or before December 31, 2024. Expect to see a final list posted to the federal register in the future.
Cornell Law School LLI has published the new law which you can read for other requirements and limitations.
Be advised that the deduction is for income taxes and will not reduce the payroll taxes on the qualified tips.
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Smoke and Mirrors with a $1 Million Portfolio
No solution is perfect, but this idea might be of interest. I recently read about the perpetual withdrawal rate, a strategy that back-testing has shown will never run out of money. You could mentally set aside a portion of your portfolio and use the 2.5% perpetual withdrawal rate to act as a substitute for an annuity, possibly to fund your essential expenses. You would still have full control and full market upside, but with much more confidence in the money's ability to last your lifetime.
You could then use a guardrail strategy for the balance of your portfolio to fund your wants. Research has shown this flexible approach can support a higher withdrawal rate than the original 4% rule. The result would be a portion of near-guaranteed income combined with a higher, more flexible withdrawal rate for your discretionary spending.
How would this work with the commonly used million-dollar portfolio example?
Imagine you needed an extra $10,000 of essential income beyond your Social Security payments. You could apply the Perpetual Withdrawal Rate (PWR) to $400,000 of your portfolio to generate this secure income stream.
Then, with the remaining $600,000, you could apply a dynamic withdrawal strategy, starting with a 4.5% withdrawal rate. This would provide you with a discretionary income of $27,000.
Combining these two amounts gives you a total of $37,000, or 3.7% of your original portfolio. While this is a small reduction on the traditional 4% rule, it is a mental accounting method that could allow you to sleep soundly during market turmoil without compromising future growth or surrendering control of your cash.
This dual-bucket strategy might offer a solution to the retirement income problem for some, providing psychological security while keeping full portfolio control. By separating needs from wants, you gain confidence during volatility without sacrificing flexibility or growth. The 2.5% foundation is historically durable, while dynamic discretionary spending captures additional returns. This idea could provide greater peace of mind than traditional strategies with more flexibility than annuities…. although I could be just talking out my a*s. Anyone got some thoughts?
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Smoke and Mirrors with a Million Dollar Portfolio
Everyone wants more security for their retirement savings, and outside of Social Security, the most reliable way to achieve this is often the much-maligned annuity. The main issue for many people is losing control of a large chunk of their retirement pot—they simply don't like the idea. But what if you could get some of the security an annuity provides without giving up control of your cash?
No solution is perfect, but this idea might be of interest. I recently read about the perpetual withdrawal rate, a strategy that back-testing has shown will never run out of money. You could mentally set aside a portion of your portfolio and use the 2.5% perpetual withdrawal rate to act as a substitute for an annuity, possibly to fund your essential expenses. You would still have full control and full market upside, but with much more confidence in the money's ability to last your lifetime.
You could then use a guardrail strategy for the balance of your portfolio to fund your wants. Research has shown this flexible approach can support a higher withdrawal rate than the original 4% rule. The result would be a portion of near-guaranteed income combined with a higher, more flexible withdrawal rate for your discretionary spending.
How would this work with the commonly used million-dollar portfolio example?
Imagine you needed an extra $10,000 of essential income beyond your Social Security payments. You could apply the Perpetual Withdrawal Rate (PWR) to $400,000 of your portfolio to generate this secure income stream.
Then, with the remaining $600,000, you could apply a dynamic withdrawal strategy, starting with a 4.5% withdrawal rate. This would provide you with a discretionary income of $27,000.
Combining these two amounts gives you a total of $37,000, or 3.7% of your original portfolio. While this is a small reduction on the traditional 4% rule, it is a mental accounting method that could allow you to sleep soundly during market turmoil without compromising future growth or surrendering control of your cash.
This dual-bucket strategy might offer a solution to the retirement income problem for some, providing psychological security while keeping full portfolio control. By separating needs from wants, you gain confidence during volatility without sacrificing flexibility or growth. The 2.5% foundation is historically durable, while dynamic discretionary spending captures additional returns. This idea could provide greater peace of mind than traditional strategies with more flexibility than annuities…. although I could be just talking out my a*s. Anyone got some thoughts?
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Remembering 9/11
Twenty-four years ago today, I was still confused about my routine since retiring the prior month. My spouse had the tv on she and called to me to come to the family room to see coverage of the 1st tower on fire in New York. I was really aghast. The stock market had cratered, and looking at the video, I knew that the building would ultimately collapse. Who could know about the profound impact this event would have on our society. It wasn’t just the loss of life and damages to the City of New York, it was the feeling of not being safe any more.
I remember getting ready to go for a walk and after opening our garage door stepping out to see my neighbor Don leaning against his car. He looked carefree and I then asked him if he had heard the news. He had not, and didn’t believe me, until he went into his house and turned on his tv. He came back out in a few minutes very shook up. Until he passed in 2014, every year on 9/11 when he saw me he would remember that day again.
What were you doing on 9/11 when you heard? How did you feel? What impact did that event have on your life?
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There is no magic number – and it sure isn’t $1 million
Having a simple dollar target makes planning appear easy, but IMO more likely to scare people into inaction because they see an impossible quest. Besides, we know very few people come near that amount and given they still retire, demonstrates the value of such assumptions.
The median household retirement savings for Americans aged 65-74 is around $200,000. The average, or mean, household retirement savings for this same age group is considerably higher, around $609,230.
According to data from DQYDJ (2024), the median individual income for a 60-year-old in the U.S. is $60,000. Meanwhile, the average (mean) individual income at age 60 was reported as $81,424
What you need is an amount in retirement investments that when combined with Social Security and other steady income sources will generate the income you determine is needed to live as you choose. HD readers mostly know this, but I suspect the wider population does not.
Aside from a person’s lifestyle, the number you need to accumulate as retirement investments depends on:
Your annual total income objective in retirement
Your age at retirement
If you have a pension or annuity?
Your household Social Security benefits **
What withdrawal percentage are you comfortable using?
Do you have income for a survivor to consider
A strategy to cope with inflation
** As of January 2025, the average monthly Social Security retirement benefit for an individual retired worker at FRA (typically 66 to 67, depending on birth year) is approximately $1,976. For a household, this amount can vary. If both spouses are eligible for Social Security, the household benefit could be roughly double this amount, assuming similar earnings histories. Or, the total benefit could be about 1.5 times the individual earners benefit.
So, even though I don’t know how to use a spreadsheet, it appears the equation may be something like this.
Feel free to jump in.
Pre-retirement income X % = desired retirement income - pension or annuity $ - household SS benefit /.04
Thus $60,000 X 80%= $48,000 - $0 (no pension) - $23,712 SS benefit = $24,288/.04=$607,200 needed for retirement assuming a 4% withdrawal rate.
Needless to say, mess with any of these assumptions (a pension changes a lot) and you get a different answer - and that’s the point after all. You can always get a different answer.
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