Whether you can’t wait to get back to the office or you’re dreading the day you have to return, there’s one silver lining to the remote working lifestyle many of us have adapted to recently. If you’ve been working from home for all or most of 2020, you might be able to lower your tax bill using the home office deduction.
Unless you happen to be an accountant, it can be tough to understand the eligibility requirements and rules, especially if you’re considering the deduction for the first time. Let’s run through some of the most common questions.
Who is eligible for the home office tax deduction?
Before I get into explaining how exactly the home office tax deduction works, you probably want to know if you’re eligible. There are two main conditions: you must be self-employed, and you must work mostly from home (well, duh).
Only business owners and employers can claim the home office tax deduction — not employed workers. Before the Tax Cuts and Jobs Act (TCJA) in 2017, employees could also claim the deduction, but this is no longer the case. Unfortunately, it’s also unlikely to change any time soon (the legislation was put in place for tax years 2018-2025).
On the bright side, there are other tax deductions you might still be able to claim.
As for the home working clause, you must either be working in your property or an adjoining structure (like a converted garage). However, you can’t work in a public property, like a hotel or inn, even if you own it.
The dedicated business space can either be a home office or a place to meet with customers or clients.
Naturally, this explanation might leave you with more questions than answers, so let’s investigate a little more.
Can I use my office space for personal matters and still claim?
You need to use part of your home office exclusively for business activities — and there’s not much flexibility with this one. You must designate a particular portion of your home to business use, and you can’t then use that room for any other purpose.
Unfortunately, that excludes anyone whose bedroom or kitchen doubles as office space.
This rule isn’t so strict that you’re not even allowed to talk to your partner in your home office or browse through your personal social media accounts on your phone occasionally — but it does mean that you should keep these activities to an absolute minimum.
A good rule of thumb is to avoid using the space for non-work activities that wouldn’t also occasionally take place in a regular and exclusive workspace or office.
Can I still claim if I also work in other places?
You need to use your designated home office regularly. Although there aren’t specific rules for exactly _how _often you need to use it, you can’t claim the deduction if you only use your home office on occasion.
Another rule is that, although you don’t have to carry out business in one space exclusively, that space does need to be your “principal” place of business. It’s okay to _work _elsewhere — some people earn their money away from an office, like tradespeople — but you have to carry out most administrative or management tasks in the space you’re claiming for..
But there’s one exception. In the case of work spaces located in unattached structures on your property, the office or meeting place doesn’t have to be your primary business location — as long as you’re using it exclusively for business and on a regular basis.
What does the home office tax deduction cover?
Once you know you’re eligible to claim, you probably want to know exactly what you can claim. These are the costs the IRS suggests you could claim for:
- Utilities (remember to keep the receipts)
- Mortgage interest (not including the principal part of mortgage payments)
- Property tax
- Homeowner’s or renter’s insurance
- Homeowners association fees
- Repairs and maintenance
- Depreciation (spreading a cost out over several years instead of claiming for the full cost all at once)
This isn’t an exhaustive list. Depending on your individual circumstances, you might be able to claim further, less common deductions — but it’s best to check with a tax professional to be sure.
How much can I claim?
Now we’re getting on to the important questions! Working out how much you can actually claim as part of this deduction is fairly complex, so listen up.
First, you must work out the total square footage of your home office and divide it by the property’s total square footage. Then, work out the percentage of total hours in the year that you worked. Finally, multiply both percentages together for your write-off percentage.
Example: 0.3 (30% of the year spent working) x 0.2 (home office makes up 20% of house) = 0.06 (6% tax write-off)
You can then apply this 6% to the total cost of home office expenses to reach your total deduction.
Thankfully, the IRS also introduced a simplified option in 2013, through which the total deduction is $5 for each square foot of home office space.
Example: $5 x 50 square feet = $250 deduction
However, this simplified method only applies to deductions of $1500 or less.
Whichever method you use, you don’t have to do it by hand — you can use accounting software like Turbotax, Quickbooks, or Xero to help you work out your total deduction.
Will claiming the deduction make the IRS more likely to investigate me?
There’s a popular myth floating around that claiming the home office deduction makes the IRS more likely to audit your books. However, there’s no evidence that this is true. Although it might have applied in the past, the IRS has explicitly changed tax rules to make applying for deductions easier. Why wouldn’t you make the most of the opportunity?
Start reducing your tax bill
The home office deduction exists for a reason — to be claimed. It might seem like a lot of bother for minimal reward, but the money can add up, especially when combined with other tax credits and deductions.
However, even if you’re confident you understand how the deduction works and that you’re eligible, it’s easy to make errors when carrying out the actual calculations. I recommend speaking to an accounting professional before filing your tax return. Who knows, you might end up saving even more money than you’d anticipated!