With more people than ever working from home, many want to claim their expenses for setting up an office space within their home. The home office deduction has been around for some time, but with ever changing tax rules, not all individuals that used to be able to claim it still can.
Tax changes put a damper on deductions
In 2017, the Tax Cuts and Job Acts (TCJA) changed the deduction for tax years 2018 to 2025. Prior to 2018, employees working from home could claim the home office deduction and other unreimbursed expenses. However, these deductions were only allowed if the taxpayer (who was an employee) itemized their tax return. In addition, only the amount of expenses over 2% of their AGI (Adjusted Gross Income) was deductible.
For example, if a taxpayer's AGI was $50,000, the first $1,000 (2% of $50,000) of home office expenses would not be allowed. However anything over $1,000 would add to the itemized deduction.
Currently this deduction is NOT available to employees for 2020. So the majority of employees (those who receive a W2) are not able to claim anything for their home office.
There is however a select few exceptions of employees that can deduct some unreimbursed expenses. According to Publication 529, those include:
Armed Forces reservists
Qualified performing artists
Fee-basis state or local government officials
Employees with impairment-related work expenses
With the majority of employees not able to claim the home office deduction then, who does qualify?
Many individuals have taken on freelance work or started a business. Those who are self-employed and have an office or work space on their personal property may qualify. Here is a list of things to keep in mind to help determine if you do.
The deduction is available whether you own or rent your home.
Beyond the physical home, the deduction could be for additional structures on the property like a barn, detached garage, shop, shed, or studio, for example.
The area MUST be used regularly and exclusively for business.
The home is the taxpayer's principal place of business.
While you need to use this area regularly, you may still be allowed to have another place where business is conducted. As long as you use the home office regularly to either meet with clients and customers, or conduct regular business matters, the regular use test would be met.
The thing that makes it hard for most people to take this deduction is the exclusive use part of the test. For example, say you have a completely separate area of your home where you work full time for seven days a week, but every evening your kids use the office area to do their homework. Now the area is not used exclusively for business, and you would not be able to claim the deduction.
Some qualified expenses
There are two methods to calculate the deduction for a home office.
The simplified method. You can claim $5 per square foot up to 300 square feet. If the space is less than 300 square feet, then you can only claim that amount. If it is more you can still only claim 300 square feet. Therefore the maximum amount is $1,500 for the simplified method.
The regular method. Expenses include mortgage interest, insurance, utilities, repairs, maintenance, depreciation and rent. The amount of each is based on the percentage of the section of the home used exclusively and regularly for business.
If you think you might qualify for the home office tax deduction but aren't sure how to go about it, feel free to contact us. We can help make sure you get all your qualified expenses counted to offset your tax bill.