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Home office deduction | 2019 tax returns
If you work from home, you could lower your tax bill with this deduction.
Small business owners, freelancers and self-employed workers can use the home office deduction to lower their tax bill. Read on to find out how much it’s worth, how to calculate your deduction and what to watch out for.
What's in this guide?
What is the home office deduction?
The home office deduction reimburses you for expenses related to having a home office, as long as it’s regularly and exclusively used for business. Items you can write off include rent or mortgage interest, utilities, real estate taxes, maintenance, repairs and more.
How much is the home office deduction worth in 2019?
Your home office deduction depends on the size of your space and which method you use to calculate your deduction.
Limits
The Tax Cuts and Jobs Act of 2017 eliminated the miscellaneous deduction for home office expenses for 2018–2025. This means you can no longer deduct expenses for unreimbursed employee business expenses, tax-related expenses and hobby-related expenses.
Your home office deduction can’t be more than your total business income for the year. If your expenses exceed your deduction limit, you may be able to carry over excess expenses to future tax years.
The home office deduction is a federal deduction, so it doesn’t change the amount of state taxes you owe.
How much was the home office deduction worth in previous years?
The home office deduction hasn’t changed since 2014.
Who qualifies for the home office deduction?
There are two basic requirements you must meet to qualify for the home office deduction:
- Your office is regularly and exclusively used for business. Your space is kept in a separate room that’s only used for business.
- It’s your principal place of business. Your office doesn’t have to be the only place you conduct business, but you do have to use it for at least part of your business, even if it’s for recordkeeping or maintaining your budget.
You can claim the home office deduction regardless of the type of structure you live in, as long as it’s your permanent residence. Common structures include:
- Houses
- Apartments
- Studios
- Garages
- Houseboats
- Condos
Am I eligible for the home office deduction during the coronavirus pandemic?
Working from home has quickly become the new norm for a lot of people during the COVID-19 pandemic. But unfortunately, you won’t get to write off any expenses unless you’re an independent contractor or entrepreneur. Prior to the Tax Cuts and Jobs Act of 2017, most people who worked from home could claim the home office deduction. But with the way the deduction currently works, you can’t claim it unless it’s your “principal place of business.”
How to claim the home office deduction
You use Form 8829 to claim expenses for the home office deduction and calculate any carryover limits. The process looks like this:
- Calculate what percentage of your home is used for business.
- Enter your total business income and deductible expenses.
- Subtract your expenses according to the form’s instructions until you have your allowable expenses.
- Calculate your home’s depreciation.
- Determine if you have any unallowable expenses that you need to carry over to future tax years.
- Take the amount written on Line 36 of Form 8829 and enter it on Line 30 of Schedule C.
- Make sure you attach Form 8829 to Schedule C unless you’re using the simplified method.
You list two types of expenses on Form 8829: direct and indirect expenses. Direct expenses are used specifically for your business and home office. Indirect expenses relate to your house as a whole, so you can only deduct a percentage as a home office expense.
This chart breaks down common direct and indirect expenses:
| Direct expense | Indirect expense | |
|---|---|---|
| Mortgage interest | ||
| Real estate taxes | ||
| Utility bills | ||
| Rent | ||
| Homeowners’ or renters’ insurance | ||
| Painting your home office | ||
| Hiring a professional cleaner | ||
| Performing maintenance and repairs |
How to calculate your home office deduction
You can either use the simplified method or the regular method to calculate your home office deduction.
Let’s look at an example of the regular method.
You live in a 1,000 square foot home where you use 10% or 100 square feet for your home office. You can write off 100% of direct expenses but only 10% of indirect expenses because that’s the percentage of your home used for business.
This tax year you spent $500 on office supplies, $2,000 in mortgage interest and $1,500 in utilities. You can claim 100% of the office supplies because it’s a direct expense, but only 10% of the others. Using the steps above, your home office deduction would be $850.
You came out ahead by using the regular method because your deduction would only be $500 with the simplified method (100 square feet X $5 = $500).
What to watch out for
Watch out for the following when claiming your home office deduction:
- Capital gains tax on depreciation. If you use the regular method to claim your home office deduction and include home depreciation as an expense, you’ll pay capital gains taxes on the depreciation deduction if you sell your home.
- Simplified method may not be best. Run the numbers both ways to see if the simplified or regular method results in the highest deduction.
- Can’t claim expenses under simplified method. If you want to write off utility bills, rent, mortgage payments or more, you’ll need to use the regular method.
- Can’t carry over with simplified method. If you need to carry over excess expenses to future tax years, you’ll need to use the regular method.
- You’ll need to keep detailed records. Taxpayers using the regular method must keep detailed receipts of any home-related expenses, including:
- Rent or mortgage payments
- Utilities
- Property and real estate taxes
- Maintenance and repairs
- Depreciation
- HOA
- Insurance
- Security
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Related tax credits or deductions
If you have a home office, you may also qualify for these related credits and deductions:
- Mortgage interest deduction. Taxpayers with a mortgage or home equity loan can deduct up to 100% of interest from their tax return.
- Property tax deduction. Beginning in 2018, you can deduct up to $10,000 of all local, state and property taxes.
- Home renovation tax credit. If you made your home more energy efficient this year, you may be eligible for the home renovation tax credit.
- Business car expenses deduction. You can deduct 100% of expenses if your car is used only for business or a percentage if it’s also used for personal reasons — subject to some limitations. The standard mileage rate is 58 cents for 2019 and 57.5 cents for 2020.
Bottom line
If you conduct business from your home, you could lower your taxes by taking the home office deduction. There are two different methods you can use to calculate it. The simple option is the easiest, but the regular method could save you the most depending on your tax situation. If you use the regular method, you’ll need to keep detailed records of all your home-related expenses.
Before you file taxes, consider hiring a professional or exploring an online service that’ll do these types of calculations for you.
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