When it comes to tax deductions, many people are thrown into quandary; especially given the current situation. This article will discuss how working from home may affect your tax deductions, and give you an insight into the Home Office tax deductions in 2020.
With the global outbreak of COVID-19; millions of people are now working from home. How does this affect the average taxpayer? Can you claim Home Office tax deductions? What are the things related to your professional life that are still tax-deductible? And how does the TCJA affect tax deductions for Home Offices? All of this will be discussed in this article.
In essence; anyone who is self-employed or owns a small business, and meets certain criteria (discussed later on in the article) can still benefit from Home Office tax deductions. But as a result of the Tax Cuts and Jobs Act, people who are employed by any organization cannot claim any home office tax deductions.
The Tax Cuts and Jobs Act and Working from Home
The president of the United States - Donald Trump, signed a 200-page bill on December 22nd in 2017. With effect from 2018 up till 2025, this affected all taxpayers. From buying, selling, or owning property, to Child Tax Credit, everything was affected to some extent by the new bill.
But with regards to the main subject matter of this topic, this act discontinued the Home Office tax deductions for any employed personnel. So even though you might be working from home now, because of the lockdown, if you are an employee of any organization you are not entitled to any Home Office tax deductions.
However, there are certain tax deductions relevant to your professional life you can still claim even if you are employed. Stick around and those will be discussed in this article as well.
Who can still Claim Home Office Tax Deductions?
If you are a self-employed individual, may it be a freelance illustrator, a content creator or even a self-employed practitioner, you can still claim Home Office tax deductions.
However, there is a certain criterion that you must meet to qualify for these tax deductions. The article will now go in-depth as to what this criterion is, the two primary methods of claiming this benefit, and other tax deductions that you might be eligible for even if you can’t directly claim the Home Office tax deductions.
Criteria of Eligibility for Home Office Tax Deductions for Self-Employed People
So, you are self-employed, which means you check the first box when it comes to being eligible for the Home Office tax deductions. But you need to have a “Home Office” to claim this benefit.
If you think you can work from your couch, or your bed and still claim this benefit, you’re mistaken. For you to be eligible for this tax deduction you must meet the conditions discussed next.
You Must Have a Dedicated Home Office
To claim the Home Office tax deductions, you must have a dedicated office space in your home that you use primarily for your professional work. You cannot have an office space that you use for personal activities as well as professional activities.
This space must be separately identifiable to be only used for professional purposes. So that means that working on your kitchen counter where you eat after packing your laptop, or the room where your kids run amok after your conference call would not qualify as a home office.
Does it have to be an Entire Room?
Not necessarily. As mentioned earlier, a home office is only a separately identifiable space where you perform professional activities only. This need not be an entire room, although that may be the case, even a separate table which has all your work-related things qualifies as a home office.
So a home office may only be just a table with your laptop and/ or books etc. where you do you freelance work; or an entire room with a desk and sofas where you meet with clients or patients. The bottom line is that it must be identifiable as a professional workspace.
Do you Have to Exclusively do All Your Work at Your Home Office?
No. You might get lazy now and again and send emails on your bed, or go to Starbucks to finish your work because your roommate’s being too annoying. But most of your professional work has to be done at your home office. It should be the primary setup where you do most of your professional work.
A Simple Way to Judge if Your Workspace Qualifies as a Home Office
Just to streamline everything that has been mentioned up till now in the article, here is a handy chart released by the IRS to help you judge if your workspace qualifies as a home office.
If everything checks out, then you are eligible for the Home Office tax deduction. Read on to further understand how you can find the amount you can save and how to claim the deduction.
Methods to Find the Amount Saved
There are two methods to find the amount you can save through Home Office tax deductions. One is the standard method and the other the simple method. Although the standard method requires precise calculations, it may very well save you more money when it comes to paying your taxes.
The reason is that often you can put any maintenance and makeover costs of your home office in this category as well. But if you are only working in your home office for let us say just this lockdown period then maybe the simple method would be more suitable.
The Standard Method to Find Home Office Tax Deductions
To find out the amount you can save through this method, you will have to find the relative percentage that your home office takes up in your entire home. Let us say your entire home is 1000 sq. ft, and your home office is only 100 sq. ft, that means you claim 10% of your entire home-related expenses as the Home Office tax deductions.
Your home-related expenses include your mortgage interest, insurances, utility taxes etc. For a list of eligible expenses, kindly check the IRS Publication 587, Business Use of Your Home. The simple formula to find the amount you would be saving would be as follows:
To better understand these calculations and expenses see the Instruction to the IRS Form 8829.
The Simple Method to Find Home Office Tax Deductions
For the quick and simple method, you would claim $5 for each square foot of your workspace that qualifies as a home office, up to 300 sq. ft. So, if you had a 150 sq. ft home office, you would claim 1505 = $750.
This method gives you a rough estimate as to what you can save and might be a good short term solution. Also, it is easier to use since you would have to keep a lot of records when doing the standard method. But using the standard method is more cost-effective and recommended.
How to File for the Home Office Tax Deductions
If you do your calculations through the simplified method, you report the deductions directly to Schedule C whereby all your business income and expenses are reported.
Types of Expenses that are Eligible for Deductibility
As per the IRS Publication 587, Business Use of Your Home the following expenses can be claimed for deductibility:
For direct expenses, the deductibility is full, except partial deductibility in day-care businesses. These expenses are only for the home office and include any painting, repairs or maintenance of the home office.
These expenses are deductible based on the percentage of the total space your office takes up in your entire home.
These expenses are for running your entire home and include your insurance, utilities, rent, security systems, telephone and internet bills, and general repairs.
These expenses are not deductible at all. These include all expenses of your home apart from the home office. This may include your lawn care or maintenance of any other part of your home that is not your home office.
All in all, it is worth checking what you may be eligible for when it comes to tax deductions. And if you do pass the criteria of being eligible for the Home Office tax deductions, you better get calculating your home office area and collecting all the forms. We hope this article would have cleared things up for you as to what constitutes an eligible home office, the eligibility of the Home Office tax Deductions and about the deductibility of different expenses; and most importantly, will let you save that hard-earned cash.