It is becoming more and more common to work from home these days. As such, many people wonder if they are eligible for any tax breaks. If you qualify, the home office deduction can substantially reduce your tax.
- How to Qualify
In order to be eligible for the home office deduction, you need to use part of your home regularly and exclusively to conduct business. You also need to prove that the home office is your primary place of business.
- The Regular Method of Deduction
Using the regular method of deduction, self-employed taxpayers are required to measure the square footage of their home office and divide it by the total square footage of the home. You then take this percentage and multiply it by your total home expenses. Home expenses to consider would include mortgage interest, rent, real estate taxes, utilities, repairs, and homeowner’s insurance.
- The Simplified Method of Deduction
Some self-employed taxpayers may find the record keeping too burdensome. If this is the case, then the simplified method may be for you. Instead of needing to calculate your total expenses and take a percentage of them, you can simply deduct $5 per square foot of office space (up to a maximum of 300 square feet). This method is intended to allow more self-employed individuals who have never considered the home office deduction before to be able to take advantage of it.
- What about W-2 Employees?
While self-employed taxpayers can deduct home office expenses directly from their self employment income on Schedule C, many W-2 employees wonder if working from home can benefit them come tax time. If you are an employee you also must prove that your home office is for your employer’s convenience, not just your own. If this is the case, home office expenses are a miscellaneous itemized deduction. This means you will only be able to enjoy a tax benefit if these expenses plus your other miscellaneous itemized deductions exceed 2% of your adjusted gross income (AGI).
The ability to work from home is a great benefit. You may be able to make it even better. Be sure to check if you qualify for a home office tax deduction. Contact us for more information on tax deductions.
Written by Katherine R. Aultz, CPA