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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.
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.
Your home office deduction depends on the size of your space and which method you use to calculate your deduction.
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.
The home office deduction hasn’t changed since 2014.
There are two basic requirements you must meet to qualify for the home office deduction:
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:
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.”
You use Form 8829 to claim expenses for the home office deduction and calculate any carryover limits. The process looks like this:
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 |
You can either use the simplified method or the regular method to calculate your home office deduction.
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).
Watch out for the following when claiming your home office deduction:
If you have a home office, you may also qualify for these related credits and deductions:
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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