One of the most significant paradigm shifts triggered by the COVID-19 pandemic was a huge increase in remote work. According to the U.S. Census Bureau, the number of people working primarily from home tripled between 2019 and 2021. Two years later, substantial numbers of people still work from home on at least a part-time basis. This, in turn, has led to the creation of home offices, which raises the question: who can claim work-from-home tax deductions?
Work From Home Tax Deduction Eligibility
Individuals with self-employment income can claim a deduction for the use of a portion of their homes as office space, along with any other work expenses considered to be “ordinary and necessary.” However, regular employees who work from home can no longer claim tax deductions for unreimbursed employer expenses related to maintaining a home office. Regulations prohibiting this came into being with the Tax Cuts and Jobs Act of 2018.
On the other hand, individuals who work for themselves on a part-time basis and have a regular employer can deduct a percentage of their expenses related specifically to their self-employment activities. The IRS allows for a “separately identifiable space”— in other words, partitions are not required (IRS Publication 587, Business Use of Your Home, p. 3 (2019)). A desk in a corner of a room could qualify if it is used exclusively for work.
Costs can also include mortgage interest, property taxes, homeowners insurance, utilities and the like. In all cases though, a home office must be used regularly and exclusively to conduct business. While a completely isolated workspace is not necessary, spreading work out on the kitchen table does not qualify, even if it happens every day, because the area is not used exclusively for work.
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Claiming Work From Home Tax Deductions
Those with self-employment income must file a Schedule C form to itemize work-from-home expenses. IRS Form 8829 is set up to help these taxpayers calculate allowable business use deductions.
It is critical to be certain that any deductions claimed will pass the “ordinary and necessary” sniff test. Installing a Jacuzzi to help you relax after work is unlikely to make the cut. However, purchasing a printer or office furniture, or installing a faster Wi-Fi modem and router, usually will.
Keeping a separate business bank account will make tracking such expenditures easier to manage. Otherwise, you’ll be faced with the tedium of weeding out your business expenses from your personal accounts.
Calculating Work From Home Tax Deductions
The process will vary according to the nature of the expenses you’re deducting. As an example, the amount of a home office deduction can be determined by a couple of different methods.
The simplified option sets the deductible rate at $5 per square foot — up to a maximum of 300 square feet. Meanwhile, the regular method is based upon the full cost of the home office as a percentage of your home. Let’s say the office space comprises 10% of your home. This allows you to deduct 10% of your home expenses such as mortgage interest, insurance, and utilities and the like.
Please note that while the regular method may allow for larger deductions, it can also entail complexities such as capital gains taxes should you sell the home. It’s always a good idea to check with your tax accountant to determine the best route.
Either way, the claimed home office expense for a given tax year cannot exceed the total income generated — minus your business expenses — for that year. However, expenses exceeding this figure can be carried forward into the subsequent tax year with the regular method. They cannot be carried forward with the simplified method though.
So, that’s basically what you need to know about work-from-home tax deductions. Keep in mind this is a general overview of the rules. It should not be considered legal advice regarding the tax codes. An experienced tax professional can provide you with all of the specific guidance you might need.