If you work from home, you may be able to write off the home office on your taxes.
You have two options for deducting your home office:
Which home office deduction method should you use? It depends on your situation.
Under the original home office deduction method, which the IRS calls the regular option, you keep track of direct and indirect home-related costs that affect your home office.
Direct costs include, for example, new lighting for your home office. Indirect costs are the percentage of your home’s utilities, repairs, insurance and the like that are attributable to your home office. Indirect costs also include a portion of your mortgage interest and property taxes, the balance of which is deductible on Schedule A.
With the regular option, these direct and indirect costs are entered on Form 8829 with your other expenses for business use of your home. The final calculation on that document then is transferred to your Schedule C and filed with your Form 1040 to report your business’ profit or loss.
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If you use the simplified home office deduction method, there’s no need for Form 8829. Instead, you use the worksheet in the Schedule C instructions. This six-line page (with a few sublines for some entries) allows you to deduct the square footage of your home office at $5 per square foot up to a maximum $1,500.
If your workspace is less than the maximum 300-square-foot area covered under the simplified method, your deduction will be less. Say you use a den or spare bedroom at home as your home office and it measures 18-by-15 feet for a total of 270 square feet. Multiply that by $5 for a total simplified home office tax deduction of $1,350.
Since your home’s mortgage interest and property taxes are not used proportionally for the simplified home office deduction, they are fully deductible as usual on your Schedule A. More appealing for many taxpayers: There is no longer the need to dig out your home records and do the math for the home office deduction.
You do, however, lose the value of home office depreciation under the simplified method. For some taxpayers, that could be a substantial amount.
If you’re thinking about building an office onto your home, see how a home equity line of credit could help.
It’s important to look at your overall tax situation and not just the dollar amounts that both deductions might provide.
For example, your choice of the regular or simplified method will affect how much of your residential property taxes are claimed on Schedule A, says Dave Du Val, an enrolled agent and vice president of customer advocacy at TaxAudit.com, based in Citrus Heights, California.
Tax law calls for a reduction in overall itemized deductions for higher-income taxpayers. By claiming the simplified home office deduction, all of your property taxes will be on Schedule A. By using the standard option, a lesser amount of property taxes will be itemized because some of that real estate tax payment counts toward your home office deduction.
If you’re going to lose some of the property tax deduction on your Schedule A, it might be to your advantage to use the taxes as part of your regular home office deduction.
In addition, if you have a smaller home office deduction, your business income will be greater. That’s good news, except as it relates to self-employment tax liability. More income means you’ll owe more on Schedule SE, which is the self-employed worker’s equivalent of the Social Security and Medicare taxes deducted via payroll taxes from wage earners’ paychecks.
And larger real estate taxes on Schedule A could mean a bigger tax bill if you are subject to the alternative minimum tax. They are not allowed deductions under this parallel tax system that affects some higher-income filers.
While the simplified method is easier to claim, some basic home office deduction rules remain in effect.
“Everyone who claims the deduction, regardless of the reporting method, still needs to meet all the qualifications for claiming this deduction,” says Du Val.
These include that the home office area be used regularly for work tasks, as well as exclusively for your business needs.
The home office doesn’t have to be a separate room, but it must be a clearly delineated area, such as a desk in the corner of your den, where only work — the exclusivity requirement again — is done.
Home workers might find some tax years that one filing option is a better choice. That’s fine. You can decide each tax year which deduction method to use.
Remember, however, that if you use the simplified method for one year and the regular method for any subsequent year, you must calculate the depreciation deduction for the subsequent year using the appropriate depreciation table. And those depreciation amounts will come into play when you sell your home. Any home office depreciation must be taken into account when calculating the home’s basis that you’ll use to figure any possible taxable sale profit.
Your prior-year home office claims, either the simplified or regular method, also could be a factor if you had any unallowed home office expenses that can be carried forward to future tax-year filings.
Du Val recommends that taxpayers continue to keep good business and home office records throughout the tax year. You’ll need them to help you determine which deduction method will save you more tax money.
The bottom line is that while the simplified home office deduction is easier for some filers, it’s not for every home worker. And it’s not as universally simple as its name might suggest.