The flowers are blooming, birds are chirping, the snow is melting and the sun is out… it must be tax season! Today, we have an essential topic for those of you who have transitioned to working from home: how you can turn your home office into a tax deduction for this year’s tax return.
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I’d like to address a topic that is growing in importance every day, working from home. Ever since the pandemic and lockdowns, there has been a major societal trend towards working from home. This has increased the value of homes in areas that are not conducive to commuting, and have changed what many people look for when buying a home… a home office, or at least an area that can be used as a home office.
Who can claim 2023 tax deductions when working from home
From the height of the pandemic till now, more people than ever are working from home, which I would say is good news. But when it comes to tax deductions, there’s good news and bad news. First the bad news. If you’re an employee working from home, you can’t typically deduct your home office. However, for the self-employed or 1099 contractors, the good news is that you can! Just ensure that your home office meets specific criteria.
In the evolving tax landscape since the 2018 tax reform, it’s crucial to understand that, generally, only self-employed individuals can claim tax deductions for working from home. However, being both an employee and self-employed doesn’t necessarily disqualify you; the key is ensuring the deductions are tied to your self-employed income rather than your employee work.”
Even in situations where you’re both an employee and self-employed, your home office must primarily support your self-employment, not your employee job. For other expenses like phone and internet, you can allocate them between self-employment, employment, or personal use. The IRS demands that home office expenses claimed on your tax return must be exclusively for your self-employed business.
Let’s explore five key tips to qualify for a home office tax deduction.
Tax Tip 1 – Deducting Home Office Expenses
If you exclusively worked for yourself or juggled self-employment with a W-2 job, you might be eligible to deduct home office expenses such as mortgage interest, property taxes, homeowners insurance, and utilities. This is particularly relevant for those employees who work from home due to employer convenience, such as a salesperson residing in a different state than the company headquarters.
Tax Tip 2 – The Simple Approach
Similar to mileage deductions for your auto, there are two ways to deduct home office expenses from your tax liability.
The first, the Simplified Method, is your quick and easy route. Calculate your deduction by expensing $5 per square foot, up to 300 square feet, capping at $1,500. It’s a breeze, and a great solution for those who don’t want to spend too much of their valuable time on this. Times is money, after all.
Tax Tip 3 – Direct Method for Bigger Deductions
For those seeking even more significant deductions, enter Tax Tip #3 – the direct method. A bit more involved, yes, but potentially resulting in a larger deduction. This method involves tracking all home office expenses, including repairs and maintenance. Plus, you get to claim a portion of other expenses based on the proportion of your home office space. We’ll explain how this works below.
Tax Tip 4 – The Importance of Record-Keeping
Now let’s talk about some tedious stuff. Boring, yes, but important for the self-employed and gig workers. Tax Tip 4 urges you to keep thorough records and save receipts for at least three years. The IRS recommends maintaining a written record or log book for any expenses you claim as a deduction. Whether it’s a credit card statement, canceled check, or itemized receipt, meticulous documentation is key.
Tax Tip 5 – Switch and Maximize Every Year
And now, Tax Tip #5 – the power to switch! Each year, you can choose between the simplified and direct methods to maximize your tax deduction. No need for a specific reason – it’s all about securing the most significant savings. So, calculate, switch, and make those deductions work for you year after year. Here’s how:
How to determine the home office deduction for self-employed individuals
It’s advisable to consider both methods to gain the most tax savings. To see which method we want to apply for the current tax year, we’ll first need to determine what our deductions would be under each method.
As we mentioned a moment ago, The SIMPLIFIED METHOD involves multiplying the square footage of your home office, used exclusively for your self-employed business, by $5 per square foot, with a maximum cap of $1,500 per year.
On the other hand, the direct method requires more involvement throughout the year and during tax return preparation but could potentially result in greater tax savings. This method calculates the home office tax deduction based on the percentage of your home office square footage compared to your entire home. Unlike the simplified method, the direct method has no maximum deduction limit, making it more appealing in certain situations.
To use The DIRECT METHOD, divide the square footage of your home office by the total square footage of your living space to determine the percentage dedicated to your business. Apply this percentage to various home expenses, including rent, mortgage interest, utilities, insurance, repairs, and allowable depreciation for homeowners.
For instance, if your office occupies 250 square feet in a 1,000-square-foot home, you could deduct 25% of eligible home-related expenses. If you had $10,000 in qualifying expenses, your potential deduction would be $2,500.
When using the direct method, remember to factor in depreciation for a portion of the house if you own it. The simplified method simplifies this process by excluding depreciation calculations from the home office tax deduction.
Home Office Deduction for Separate Spaces
A common question – can you use the same space for your W-2 job and side gig and still claim the deduction? Unfortunately, no. The IRS allows deductions for a dedicated space exclusively used for self-employed business. However, if you have separate spaces, you can still claim eligible expenses for your self-employment work even if the expenses for your employee space aren’t deductible.
What if Your Home Office Doesn’t Qualify?
If your home office doesn’t currently qualify, consider switching to independent contractor status or starting a side business. Ensure your home office for the side business is in a different location than your employee workspace. And don’t forget, even if you can’t qualify, check if someone else in your household can benefit from the home office deduction.
Conclusion
Working from home can not only bring happiness but also significant tax breaks. If you’re considering a permanent move, perhaps to a nicer neighborhood further from the city, think about the tax breaks Proposition 19 offers if you move to another location in California.
And there you have it, turning “Working From Home” into a “Tax Deduction” for 2024. Until next time, stay informed and make the most of your home office tax deductions. Remember, Rock Real estate is all about maximizing your most important asset – your real estate!
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