After everything that we went through in 2020, you might think that working from home entitles you to a generous home office deduction on your 2020 IRS Tax Return. But that is only going to happen for some of the people who are expecting it. According to the Stanford Institute for Economic Policy Research, nearly twice as many employees were working from home than traditional workplaces last year. However, only a fraction of these people will be able to use the 2020 home office tax deduction thanks to the 2018 Tax Cuts and Jobs Act (TCJA).
TCJA did away with deductions for unreimbursed employee expenses that were previously shown on Schedule A as miscellaneous deductions. The logic in 2017 (when TCJA passed) was the increase in the standard deduction for all filing statuses would make up the difference. However, the states of Alabama, Arkansas, California, Hawaii, Minnesota, New York, and Pennsylvania (possibly others) do allow deductions for home office expenses from state income taxes.
TCJA only affects people that still work for an employer. Many of these people were paid a stipend or otherwise reimbursed for home office expenses such as printer paper, ink cartridges, and even new office furniture. Still, you probably weren’t reimbursed for keeping the heat turned up all day because you were working from home. These kinds of extra costs can really hurt financially if you were one of the TV reporters that had to put in a home production studio. If you worked from home for an employer and weren’t fully reimbursed, you might want to talk with your H.R. department.
Self-employed people are still able to take the home office deduction. But ordinary workers cannot. If you're an employee at a "regular" job, but you also have a side hustle, you can claim deductions for business expenses and the home office deduction for your own business (if you meet all the requirements). Being an employee doesn't mean you can't also claim the deductions you're entitled to as a self-employed person.
The distinction is that you must file Schedule C, (Sole Proprietorship, LLC, etc.) with your tax return to take the deduction. But maybe your work hours were reduced because of the pandemic and you took on some self-employed work that can still qualify for the home office deduction. The home office deduction can still apply to gig and others working part time on the side.
If you’ve been self-employed and claimed a home office deduction in the past, not much has changed. The home office space must be used exclusively for business. Technically, the space won’t qualify if it’s an extra bedroom that your college buddy slept in on New Year’s Eve but the chances of an IRS audit catching that are almost nonexistent. Home office audits are no more likely than any other audit as long as the numbers aren’t extraordinary. Your best protection against an audit is having a picture of the space being used exclusively as an office.
There are exceptions to the requirement that space is designated exclusively for work, with in-home daycare for children or the elderly being the most common exception. You’ll need to document any exceptions and comply with the IRS rules. But for most self-employed workers there are two ways to claim the home office deduction. You’ll want to see IRS Publication 587 for a full explanation of allowed deductions.
Direct expenses related to your office. Also known as the “standard option,” you deduct your actual expenses. You can deduct 100% of some of your home office expenses, such as the cost to paint or make repairs to that specific area. You can also deduct a portion of some overall household expenses based on the home office portion of your home. For example, if your home office is one-tenth of the square footage of your house, you can deduct 10% of the cost of your mortgage interest or rent, utilities (such as electric, water, and gas bills), homeowners insurance, etc. You can also deduct 10% of other whole-house expenses, such as cleaning and maintenance costs for things like furnace cleaning.
However, this is the more complicated method of deducting home office expenses because things like home depreciation have to be calculated and tracked over many years. You also have to keep every receipt used for the deduction in your tax recorders. If you go this route, you need to follow the separate instructions in IRS Form 8829.
The simplified method. This method has been available since 2013 and doesn’t require complicated calculations or keeping detailed recorders of all your costs and receipts. Instead, you simply deduct $5 per square foot of your home office, up to 300 square feet, for a maximum deduction of $1,500. Most tax software automatically makes the calculation based on you entering the square footage.
Unfortunately, you’ll likely miss out on many allowed deductions using the simplified method if you have much more than a bare-bones office. But keep in mind that this method is taken on Schedule C where you also report other business income and expenses like advertising, travel, legal, supplies, etc.
Pro-rate for part time work. You can use either method even if you only use your home office a few months of the year. But it must still be used exclusively as a home office. For example, if you worked from home for 7 months and your home office was 300 square feet, you can take an $875 home office deduction. For a home office that is 300 square feet or larger, you deduct $125 for each month that you work from home.
Using the direct method to pro-rate, calculate the actual expenses (mortgage interest or rent, utilities, homeowners insurance, etc. based on the percentage of your home's square footage that you use as a home office during the months when you're working from home.
Please leave your suggestions for maximizing home office tax deductions.
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