Major improvements can (theoretically) reduce your income tax when it comes time to sell your home. This is because major improvements add to the cost basis of your home, which is then subtracted from the home's sales price.
For example, if you bought your home for $125,000 and added another $100,000 worth of major improvements over the years, your cost basis would be the sum of the original price paid plus the improvements, or $225,000.
If you later sell your home for $500,000, your profit (gain) from the sale would be $275,000 ($500,000 sales price minus your $225,000 cost basis) instead of $375,000 (the sales price minus the original $125,000 you paid). In this case, your improvements would've reduced your gain by $100,000.
However, under current federal law, the first $250,000 of profit on the sale of your principal residence is tax-free anyhow ($500,000 if you file jointly) as long as you have owned and lived in the home for at least two of the five years before the sale. So, in the above example, a single filer would only be paying capital gains tax on $25,000, since the first $250,000 of the $275,000 gain is tax-free. (A couple filing jointly wouldn't pay any capital gains tax on the sale, as the entire $275,000 profit falls within the $500,000 threshhold.)
For all practical purposes, major home improvements don't have any effect on your taxes, unless your home's value has increased substantially since its purchase. Even then, because home selling prices are determined more by local market values than major improvements, consider any monetary gains (tax-wise or otherwise) from a home improvement project as a pleasant windfall, not a foregone conclusion.
But if you feel that major improvements might help you avoid capital gains tax down the road, you should keep good records in case you need to justify them to the IRS.
