Many Americans have spent some or all of the last 18 months working from home due to the COVID-19 pandemic. Since working from home meant setting up some sort of office in our houses or apartments, many Americans are looking forward to claiming a office deduction on their taxes. Unfortunately, for most employees who made the switch to working remotely during the pandemic, options are limited.
Keep reading to learn what the home office deduction is and who qualifies for it.
Who Qualifies for the Home Office Deduction?
As the name implies, the home office deduction is a tax deduction for individuals who work from home. Before the passing of this legislation, traditional employees could qualify for the deduction if they could make the case to the IRS that it was in their employer’s best interest for the individual to work from home. Unfortunately, the 2017 Tax Cuts and Jobs Act eliminated the deduction for traditional employees — making it so that only the self-employed, independent contractors, and gig economy workers are eligible for the home office deduction through at least 2025.
So, even though many of us have built and used home offices since the initial outbreak of the COVID-19 pandemic if you receive a regular paycheck or W-2 from a traditional employer, you are ineligible for the home office deduction on your taxes for the next four years (pending new legislation).
How Does the Home Office Deduction Work?
If you are eligible for the home office deduction, you can choose one of two paths when filing your taxes.
- Simplified Method: The easier of the two options, when using the simplified method, taxpayers measure the square footage of their home office and then multiply that number by $5. So, if your office is in a 12×10’ bedroom, your home office deduction would be $600.
- Regular Method: When you choose the regular method, you must complete Form 8829 to determine the amount of their deduction. This form details deductible expenses such as insurance, utilities, repairs, and mortgage interest — among other common expenses. You’ll add these figures together and then multiply that number by the percentage of your home that your office occupies.
You’ll want to use whichever method will net you the greater deduction, so you’ll need to determine that figure for both options and then move forward from there. If you have questions or concerns about this process, an experienced tax professional can help.
What Are the Requirements for the Home Office Deduction?
Homeowners and renters alike are eligible for the home office deduction regardless of the type of home you live in or where your office sits on your property. So, whether you renovated your woodworking shed or set up a desk and a monitor in the corner of your bedroom, any type of dedicated workspace counts as an office—as long as it is your primary place of business. The two exceptions are for individuals who use their homes for childcare or elderly care and for individuals who use their home office to store inventory.
3 Simple Tips to Maximize the Home Office Deduction
For those taxpayers who are eligible, here are a few simple ways you can maximize the home office deduction for the best results on your annual income taxes.
- Claim Every Deduction Available. Many eligible taxpayers are so worried about the potential for an IRS audit that they choose not to take the home office deduction. This deduction could potentially be quite lucrative, so you should at least speak with a dedicated tax attorney to determine your potential tax savings (or even a refund).
- Document Your Expenses. The best way to maximize your deduction and avoid the potential audit mentioned above is to document and save all business expenses throughout the year. This could include receipts for a trip to Office Max, your monthly mortgage statement, and everything in between. If it’s a cost that is even tangentially related to your profession and home office, keep the receipts.
- Be Honest. Never exaggerate or embellish home office costs. Doing so could get you in serious hot water with the IRS and just isn’t worth the trouble. You should also know that, for homeowners, you will be required to depreciate the value of your home if you use the Regular Method for the home office deduction. This means that if/when you sell your home, you will likely be subject to capital gains tax for the percentage of the home you’ve used as your home office.
S.H. Block Tax Services Can Help With All Your Complex Tax Questions
If you’re wondering if you qualify for the home office deduction or have any other tax-related questions, the team at S.H. Block Tax Services is here to help. Our knowledgeable and experienced tax attorneys and staff have been serving the state of Maryland for decades and are excited to learn how we can work together to get your tax situation back on track.
The content provided here is for informational purposes only and should not be construed as legal advice on any subject.