Did you work from home this year? Find out when you can claim the home-office tax deduction.
If you were part of the “Great Resignation” and it lead you to start a business or become your own boss recently, you may be able to write off the cost of your home office come tax time.
If you’re not a 9-to-5 worker anymore, you can now take advantage of the home-office deduction. It’s one of the biggest deductions that people who work out of their homes can take.
Here’s who can claim the home-office deduction
There are some limitations when it comes to who is eligible for the home-office deduction, even though millions of Americans have worked from home over the past couple of years due to the pandemic.
The tax break is generally only for those who are self-employed, gig workers, or independent contractors, not those who are employed by a company that gives them a W-2 come tax season.
“Employees who receive a paycheck or a W-2 exclusively from an employer are not eligible for the deduction, even if they are currently working from home,” the IRS said in a September 2020 reminder on the home-office deduction.
There may be some confusion, as the home-office deduction was previously allowed for employees. The Tax Cuts and Jobs Act of 2017, however, banned such workers from taking the deduction from 2018 to 2025.
To claim the home-office deduction, taxpayers must exclusively and regularly use part of their home or a separate structure on their property as their primary place of business. This includes a place where you greet clients or customers, conduct your business, store inventory, rent out or use as a daycare facility.
You don’t have to be a homeowner to claim the deduction — apartments are eligible, as are mobile homes, boats, or other similar properties, according to the IRS.
It’s also possible to take only part of the deduction. For example, if you left a 9-to-5 job, started your own business in a given year, and use your home as your primary office space, you may be able to claim the deduction for part of the year.
How the home-office deduction works
There are two ways that eligible taxpayers can calculate the home-office deduction.
In the simplified version, you can take $5 per square foot of your home office up to 300 square feet, giving the method a $1,500 cap.
This home office needs to be only used for your business — as in, it can’t be a guest room with a desk in it — and you must be able to prove that you need an office for your work. The burden of proof for taking this deduction is on the taxpayer, so if you’re audited, you will have to back up your claim to the IRS.
The regular version of the deduction is a bit more complicated, as you must keep track of all your actual expenses. You can write off up to 100% of some expenses for your home office, such as the cost of repairs to the space.
You can also deduct a portion of other expenses, including utilities, based on the size of your office versus your home. For example, if your home office is 10% of your entire living space, you can deduct that much from the costs of mortgage, rent, utilities, and some kinds of insurance. IRS Form 8829 will help you figure out the eligible expenses for business use of your home.
Because of this calculation, people with larger homes may not get as much using this method. You can switch methods year to year and should try to calculate both to see which will yield a larger deduction.
If you aren’t eligible
While employees may feel like they’re missing out, the home-office deduction isn’t generally leading to outsized savings for those who take it.
The $1,500 maximum for the simplified deduction generally equates to about 35 cents on the dollar for most taxpayers, said Markowitz. That ends up being about a $525 write-off, he said.
In addition, taking the deduction could make it more difficult to sell your home in the future, if you own. That’s because you can depreciate the value of your home office, which could create a tax event later when you sell.
Still, that doesn’t mean the home-office deduction isn’t worth taking if you’re eligible for it.
If you have any questions about this, or any other tax matters, please don't hesitate to reach out to me or any of my Tax Problem Solver Team, and we can help you with whatever's going on. Contact me by one of the methods below in the blue box, or email me at Larry@TaxProblemSolver.com and we can review your specific issues and solve them. You can also click here to book a free consultation.
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