The home office tax deduction offers huge tax savings to those 24% of employed people who now do some or all of their work at home. Yet of all the tax breaks available, this one is among the most murky and misunderstood—all the more so since tax codes are changing big-time for 2018.
All of this means it’s high time all you work-from-home folks—business owners, contractors, occasional telecommuters—get a crash course on how to take a home office tax deduction, and what might change once the new tax codes kick in next year. Here’s what you need to know before filing this year and beyond.
Who can claim the home office tax deduction?
Simply put, the home office tax deduction allows you to write off part of your home expenses on your tax return by separating out the costs associated with using your home for personal purposes (making pancakes) and business (answering work email). To claim the deduction, an area of your home has to be designated as your principal place of business, and—the clincher—used exclusively for work
To be clear, that room you work in which doubles as a guest room when mom visits won’t pass muster, even if you spend 40 hours a week there, says Abby Eisenkraft, financial expert and author of “101 Ways to Stay Off the IRS Radar.” So if you really want to do things right, have mom sleep on the couch!
If, say, your desk is parked in a corner of your bedroom or part of an open floor plan, simply measure the space you use for your office, whether or not there are walls. The key is the area must be used only by you, just for work—not to peck out personal email. To make that delineation easier, you can even put up a physical barrier like a partition or shelves.
What if I’m employed by another company?
If you work for someone else (and receive a W-2) but telecommute, you can also claim the home office tax deduction—at least for this tax season (read on to find out what happens in 2018). But the home office must be for the convenience of the employer—because, say, the main office is 100 miles away.
“The IRS will look at this closely and request proof such as a letter from the company,” says Eisenkraft. If you simply prefer to work at home, you can’t take the home office tax deduction.
“That’s considered for your convenience,” explains Eisenkraft, “not the employer’s.”
How to claim a home office tax deduction
The IRS offers two ways to calculate a home office tax deduction—one simple, the other a bit more involved, says Jeff Morris, accounting partner at Nathaniel Jacobson, serving Maryland and Washington, DC.
The simple method: Figure out the square footage of your home that you use for business purposes. Each square foot you use for work is worth $5, and you can claim up to 300 square feet, for a maximum annual claim of $1,500, says Morris.
The complicated method: Track all the costs of your home (think maintenance, insurance, repairs, utilities, real estate taxes, etc.) and depreciation (normal wear and tear).
Next, separate and allocate those expenses based on the percentage of the home you use solely for business purposes. So if your office space breaks down to 10% of your home’s total square footage, you can deduct 10% of your home costs—which could add up to a sizable chunk of change. The key to using this deduction is keeping careful records.
Isn’t the home office tax deduction a red flag for an audit?
Nope. In fact, the IRS created the simplified, square-foot-of-office-space method to take the audit fear out of the home office tax deduction.
“This might surprise some people, given the fear of an audit that the home office deduction used to strike in the hearts of many taxpayers,” says Morris.
The reality is that the deduction is becoming increasingly common, and it doesn’t make a taxpayer any more susceptible to an audit than any other deduction a small-business owner may take.
How the home office tax deduction changes next year
Starting in 2018, the Trump tax plan eliminates this deduction for employees who have an office to go to but work from home occasionally. Only self-employed people (business owners or contractors) can continue with this deduction.
But a small loophole does exist, if your employer is willing to play along: Just ask your employer to set up what’s called an “accountable plan.”
For example, let’s say you were paid $100,000 in gross wages for 2017 and are able to deduct $5,000 in home office expenses. With an accountable plan, your employer could instead pay you $95,000 in wages plus a $5,000 home office expense reimbursement, making your salary the same for both years—while also saving you more on taxes.
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