If you are working from home, there are several tax deductions that you can take advantage of. It includes tax deductions for using part of your home as an office or even the expenses that are tax deductible.
Essentially these tax deductions include any kind of deductions that you can claim for using part of your home as office space. These tax deductions for working from home often act as an incentive that encourages you to work from home instead of hiring a separate office space for the same purpose.
We decided to help you understand the basics of the working from home expenses that are tax deductible. This will help you understand how you can take advantage of this opportunity to save thousands of dollars every year. The US revenue department has several provisions if you work from home. Here is a quick look at what is tax deductible and how you can claim it in your average tax return on an annual basis. We also help outline the cardinal requirements that can help you take advantage of these clauses in a sustained manner.
Do You Qualify for Work from Home Tax Deductions?
When you are making a relative assessment of the kind of tax deductions that you can claim if you are working from home, you must remember that not everyone can claim it. There are some basic requirements that help you qualify for these tax deductions.
The first and most important requirement is undoubtedly the exact space that you want to claim tax exemption.
Let’s say that your work primarily needs you to work with the help of a laptop and an internet connection. You like working at your study table in the living room and do most of your work sitting there. Can you claim tax benefits for your living room then or would the IRS look at it as part of your home? Well, the revenue department specifies that you can claim to work from home tax deductions if you use a specific part of your home only for your work/business.
Also, for claiming your home business tax deductions, it is important to project that you are using the space predominantly for your work. So let’s say that the study table, we mentioned in the above example, is where you are able to complete at least 95% of your work or even more at times. So you can then claim the tax deductions for this space, even though you might be traveling or working from the lawn for rest of the time.
Of course, filing or claiming home office tax deductions isn’t very simple. You need to refer to a thorough tax professional who can guide you towards the appropriate format. Only an experienced tax consultant will be able to guide you about the possible provisions and how you can take advantage of these in the most sustainable fashion. This is because most times, these provisions are intensely confusing and for average people, it appears rather confusing. Only when you are able to claim these tax deductions designed for those who are working from home in a specific manner, it becomes a lucrative proposition for you. The tax consultant, most times, is the only person well qualified to help you take that step in an appropriate manner.
How Can You Make Your Home Office Expenses Tax Deductible?
So, that brings us to the next point of discussion. This is how exactly you can claim tax deduction for working from home. Well, an astute tax consultant will tell you that:
1) You can often claim at least a part of the expense incurred for your work as tax deductions.
2) The deduction is especially for the area that you have earmarked as office space within your house.
3) You must ensure that for claiming tax benefits, you need to work from home on a sustained basis.
4) If you are working from home on a stop-gap basis or only occasionally, then you can’t claim tax deduction for working from home.
5) Also, the part that you have set aside as your workspace should not be the same structure as your home. It could be in the same area but a different structure like the garage or perhaps a small enclosure created for this purpose. The distinct work area is very important. Like we had mentioned in a previous example, even if you did all your work from the living room study table, the tax department will still look at it as part of your house and not as your office space.
This fact is particularly useful to remember in terms of allocating the expenses like
- Maintenance cost
- Utilities bill
- Insurance expenses
You might decide to spend a certain amount thinking you can claim it back as tax deductions but your plan might completely fall flat if you cannot project that part of your house as office space. Therefore, the primary rule of the game is to understand what part and how much of the house can you successfully project as office space and then make a calculation on the basis of that.
The Employer’s Role
If you are not self-employed but working from home, it is very important to understand and ascertain the benefits that accrue to your employer for claiming the tax deductions. Well, we all understand that your employer can derive several advantages like low overhead cost, relatively lesser utility bill and of course as an incentive to you as an employee.
But the point is, are you able to convey the same to the tax department or are you on the same page with your employer in this regard?
The point is if you are interested in claiming home business tax deductions, it is very important to understand the ‘Convenience of the employer’ clause. According to this clause, you need to highlight that you are working from home, for the ‘convenience of the employer’. This means that employer must suggest you or need you to work from home, to claim this tax deduction.
You could either show it in writing from your employer claiming that they need you to work from home. You could also establish that your office is entirely virtual and there is no well-designated office space. Only then, you can convince the Revenue Department or the IRS that you deserve to get the tax deductions.
Calculating Work from Home Tax Deductions
It is also important to understand the amount that you can claim as a tax deduction. Just like your regular tax deductions have options of either standard deduction or even itemized alternatives, the IRS provisions have different computation method for work from home tax deductions.
Those, who are working from home and interested in getting tax benefit, you can either claim the exact percentage of the house you use for your profession as tax deductions or go for a relatively new form of tax computation. In this, tax deductions are calculated at the rate of $5 for every square foot that is used as office space in your home. But that amount is capped at a maximum amount of 300 square feet.
Here is a simple example of this type of tax calculation. Let’s assume the office space that you use is roughly 15 ft by 25 feet, the total area of your office would be 375 square feet. In that case, you can only claim deductions for only 300 square feet. At $5 per sq ft, the simple calculation would cap deductions at $1500.
But as your office space is more than 300 square feet, you could also look at calculating on the tax deductibles on the basis of the actual expenses incurred. So in this case, you are not just accounting for mere workspace but also other associated expenses that go with maintaining the property. These could include:
- Painting supplies
- Mortgage expenses
- Rent outgo if applicable
- Utilities like power, water and other facilities
- Security features that need to be installed
- Maintaining the hygiene like sewerage and garbage facilities
- Depreciation value of the overall property
Of course, this is a rather complicated and often relatively a lot more time-consuming method. This is applicable and useful for relatively larger properties or home based offices using up larger areas. What is useful to remember that you can claim the entire mortgage or rent amount in whatever way you calculate the expenses. So while you can take advantage of working from home, with the help of a proper tax consultant, you can also maximize your tax benefits.
Of course, a tax consultant will be able to guide you appropriately about the possible ways to compute the tax deductibles that you need to account for. The self-employed professional has the option of filing it in Schedule C while an employee can take advantage of various itemized deductions applicable in Schedule A. Therefore for effective and relevant work from home tax deduction, you need to work in tandem with an efficient tax professional who will be able to guide you in an appropriate manner.
What Counts as Work from Home Expenses?
Well in this regards, you must also have a clear idea of what gets counted as work from home expenses? Well, we now know that you can account for your mortgage and maintenance cost in claiming tax deductions. But apart from that, you could also look at writing off the business expenses.
However, writing off these expenses could be actually more difficult at times than claim tax deduction for your office space in your home. While technically all the software, hardware, gadgets, devices, book and stationary that you use could get counted as expenses, the point is can you claim a tax deduction on all those counts if you are working from home. But there is a huge catch in this one.
Remember that most time tax deductions from work from home expenses would be entirely itemized. Also, you need to assess the relative difference between standardized and itemized deduction and check which arrangement allows you to gain the maximum benefits. In this regard, you can only look at claiming about 2% of your adjusted gross income as miscellaneous deductions.
However, if this is not your own business and you are working from home on behalf of some company, it is a lot better option to get your employer foot the bill instead of depending on your getting potential tax deduction. Calculations would show that the relative gains for a person working from home would be much higher in this case when the employer reimburses you.
But the dynamics are very different if you have your own business or are self-employed. Several expenses would make sense to be written off as business expenses. Of course, this would mean your relative profit amount would be lesser, but you can get the benefit of favorable tax deductions. So everything from your stationary cost to internet connection and the expenses related to buying software and hardware can be all accounted for getting tax breaks. But don’t fool yourself thinking you will be able to do this computation help. Always take professional help and make sure you get the maximum advantage.
In this regard, if you are working from home and it involves a significant amount of travel, it would make sense to keep a close watch on them. This will help you get a better handle on your expenses and increase the amount that you can claim a tax deduction on them. Any astute tax professional will explain to you how you also need to keep all written records intact. It could range from the smallest bill to buy a client a cup of Starbucks Coffee to a major infrastructure change that you have undertaken in your home office. They will all work together in helping you clock sustainable tax deduction and better cost rationalization.
However, working from home tax deductions are tricky. The revenue department is significantly more careful about them, given the potential for misuse. Therefore if you want your home office to take advantage of these tax deductions, it is important you understand the rule book very clearly.
While these tax breaks can be extremely lucrative, a wrong interpretation can result in huge losses as well. Consistent and diligent record keeping is what will help you get maximum advantage from the work from home tax deduction provisions. Be it computing work from home expenses or profit calculation; an efficient tax consultant can be your best friend in this regard and a keen eye for details, your greatest alibi.