Home Office Tax Deduction for Those Who Work from Home
Not to panic. Not to fret. Just to prepare, and start thinking about the end-of-the-year things you can do now, while some of you are off work – either for the holidays or because of this eternal pandemic. Plus, there are a few nifty tax tools coming along soon which I’m going to suggest you keep an eye out for.
So bear with me for a few minutes as we hit a few basic issues surrounding the home office tax deduction of which you should be aware. I promise, I’m only trying to look out for you. I’ve avoided thinking about taxes for too long on many occasions and always ended up regretting it.
Let’s Start With The Bad News…
If you’ve been working from home due to the pandemic, but you still technically work for someone else – a company, an individual, a school, a restaurant, anyone – you can’t count any of that as a “home office” for purposes of your taxes. Sorry. Not my call.
If that sounds new, you’re right – it is. Prior to the Tax Cuts and Jobs Act (TCJA – the fancy name for the GOP tax cut package they were so excited about a few years ago), employees working at home for most reasons could take numerous deductions. Why they changed it, depends on your political point-of-view. If you lean a bit right, the change is more than offset by the higher standard deduction set by the same legislation – yay for simplified taxes! If you lean a bit left, they cut your deductions in order to give more to the ultra-wealthy in hopes that THIS time all that special treatment they get will “trickle down” to the rest of us somehow.
I’m far too fair and balanced to take a stand on the issue myself. The important thing is that, since 2018, the home office tax deduction is for freelancers, entrepreneurs, or other self-employed individuals.
The deduction only applies to the part of your home which acts as your primary place of business. That doesn’t mean you can’t meet clients at Panera or periodically put in some time at the library or coffee shop. It means that there’s a place in your home or on your property which is devoted exclusively to doing whatever you do for a living – even when there’s NOT a pandemic.
And just to be clear, this the home office tax deduction is not a tax credit. Deductions reduce the income on which your taxes are computed. Essentially, they allow you to pay taxes on a lower amount of money, which sometimes even means a slightly lower rate as well. Tax credits are flat amounts added to your refund. You can receive a tax refund as a result of a tax credit even if you didn’t make enough to owe any taxes at all that year. It doesn’t work that way with deductions.
Don’t Worry – There’s Good News, Too
It doesn’t have to be a house and you don’t have to own it. The home office tax deduction is available if you work out of your apartment, rental home, condo, garage, etc. If you have a storage shed out back you’ve fixed up for your novelty sweaters and self-heating nail polish business, that’s a “home office” as well. It does NOT apply to hotels or other temporary lodgings, or if you’re not actually paying to live there. It’s swells of your buddy from college to let you sleep on his couch, but you don’t get to deduct his grocery bill or the additional laundry expenses on your taxes.
If you are paying the bills, however, the home office tax deduction isn’t necessarily limited to your rent or mortgage payments, however. We’ll discuss the computation in a moment, but if you have a qualifying space in your home (or at least on your property), you can probably deduct a percentage of your utilities, internet, real estate taxes, and the like, as well.
While there’s perhaps a degree of subjectivity in some of these calculations, make sure you can support any home office tax deduction you take with receipts, bills, printouts, and math. I find it’s best to write out (or print) any process I use to determine my deductions and write a brief note of explanation to myself. I include this in the same folders where I keep the rest of my tax paperwork. That way, if I revisit it a year later, or if I’m ever audited, there’s a reasonable chance I can at least recall my own thinking and figuring at the time.
This is particularly important because, if we’re being honest, 2020 me isn’t always all that impressed with the thinking and reasoning of, say… 2017 me. Likewise, I can’t imagine 2021 me will automatically know what 2020 me was thinking without at least a line or two of explanation.
Calculating Your Home Office Tax Deduction
There are two basic ways to calculate your home office tax deduction, often simply referred to as the “easy way” and the “hard way.”
Unlike when someone’s being threatened in the movies, however, one method isn’t necessarily better than the other. It really depends on which system gets you a better deduction.
The Standard Home Office Tax Deduction (Take It Easy)
This is the “easy way.” It starts with you figuring out how much space you actually use as a home office. If there’s a particular room devoted exclusively to your small business or freelancing, you’ll need to know the square footage of that room. If it’s a desk with a few filing cabinets incorporated into one of those “open floor plans” all the kids are into these days, you’ll need to establish some fictional – but realistic – walls for your “office” and figure out how many square feet are included in that.
For your 2023 taxes, you’d simply multiple that square footage (up to a maximum of 300 square feet) by $5 per square foot. That’s your home office tax deduction. Assuming that number isn’t likely to change between now and the end of the year, you can get back to your turkey-stuffing or Christmas shopping or whatever, and thanks for stopping by.
Then again, it might be worth a little extra cypherin’ to see if the “regular method” (i.e., the “hard way”) of calculating your home office tax deduction works out better for you. We may have a few months before it’s tax filing time, but aren’t you a little curious?
I knew you would be. I’m just that good.
The Regular Home Office Tax Deduction (It’s Not THAT Hard)
This one requires a bit of figuring, meaning the IRS has a special form just for the occasion. Form 8829 walks you through the stops of computing your home office tax deduction the “regular” way.
It starts with the same square footage we discussed above – the area “used regularly and exclusively for business, regularly for daycare, or for storage of inventory or product samples.” The next line asks for the total square footage of your home.
You divide the first number by the second and enter it as a percentage. This is the percentage of your home which you use as a home office.
For example, let’s say your home is exactly 2,000 square feet (we’re keeping the math simple here). Your home office area – we’ll make it a small room that used to be a kid’s bedroom – is precisely 200 square feet (again, keeping the numbers simple). That means your home office is 10% of your total home space. That would go on Line 3.
If you run a home daycare, there’s one additional level of good times. The percentage of space you use as part of your daycare has to be multiplied by the percentage of the time it’s used as such. For everyone else, your home office is your home office all day and all night, year-round, rain or shine, etc. It almost makes those home daycare people seem like they’re slacking, doesn’t it? Putting in those sweet 10-hour days while the rest of us are clocking in 24/7, at least in terms of Form 8829. And it’s from the government, so you know it’s entirely reality-based and practical.
Handle Your Business Taxes Like a Boss.
The Taxry Store is Here for You.
Figuring Out All Those Deductions
Despite my snark regarding good ol’ Form 8829, this is where it would actually come in quite handy as you figure out exactly what sorts of home office tax deduction you’re eligible to take using the regular method. Most of it’s pretty straightforward. For things like the interest you’re paying on your mortgage, real estate taxes, insurance, rent, repairs and maintenance, utilities, and a handful of qualifying “other expenses,” you total them up and multiply them by the percentage of your total home devoted to your home office (as computed in lines 1 – 3 above).
Of course, there’s the usual “add lines 16 – 20 and if the amount is less than line 24, subtract your mother’s birthday from the middle seven digits in the VIN of the vehicle you use most often for work but it equal to or greater than line 24 multiply the total by the appropriate prime number as determined by your Zodiacal sign (see instructions) unless you were in a fraternity or sorority in college in which case GO GAMMA DELTA GAMMA!”
I may be paraphrasing
It’s not actually that bad, but there’s a reason this particular method isn’t called “the easy way.” It involves computing some depreciation and sorting out some terms and really does included lines like “limit on excess casualty losses and deprecation” and “casualty loss portion, if any, from lines 14 and 33. Carry amount to Form 4684 (see instructions).” These are all doable, however, with a little patience and if you don’t wait until the last minute to get started.
In case you’re curious, “casualty losses” are those resulting from damage, destruction, or loss of property due to sudden, unexpected events – fires, floods, earthquakes, volcanos, sharknadoes, etc. It does not include normal wear and tear.
In general, if you have substantial home office expenses or dedicate well over 300 square feet of your home to your small business or freelancing work, this method is at least worth considering. If you have a small office and minimal expenses to keep going, the standard method (the “easy way”) is probably fine.
What Should I Be Doing Now To Prepare?
No matter when you plan on actually doing your taxes, there are simple things you can be aware of and small steps you can take throughout the year to make that timeless stressful and more efficient when it arrives. Most of these are a matter of keeping track of stuff you’ll need when it’s tax filing time so you don’t have to go digging quite as much when you need them.
You don’t even have to worry about which method you’ll use or the details of how each is computed as part of your home office tax deduction for 2020 right now. The important thing is that you’ll have relevant receipts, bills, emails, and other info all together in one place when you need it. We’ll assume for now that you’re already keeping track of the big stuff – your mortgage payments, business loans, education related to your profession, self-employed health care, etc. But the little stuff can add up substantially throughout the year. It’s worth a little extra trouble here and there to document as you go.
Here are a few things I try to keep track of throughout the year for my own home office tax deduction:
Vehicle Mileage
Any time I drive more than a few miles to lead a workshop or participate in a writers’ group, I record my round-trip mileage that day along with the date and precisely where I went and why. I always take the standard mileage deduction for business stuff (this year it’s 57.5 cents per mile) and it’s a number that’s nearly impossible to estimate accurately months after the fact.
If you do more extensive business travel – by air, train, cargo ship, etc., you’ll obviously want to hang on to those receipts as well. Be prepared to justify any expenses you claim. Taking the kids to Disney World and handing out a few business cards while you’re there doesn’t make the entire trip deductible. Sorry – not my rules.
Meals
This only counts for actual business-related meetings with clients, suppliers, contractors, etc. The meals can’t be particularly lavish and you can only take 50% in this category. And no, the Door Dash you ordered while writing alone at your desk doesn’t count.
Office Supplies and Postage
These aren’t calculated according to the percentages discussed above, but they are valid deductions as long as you keep your receipts straight and stay honest with yourself about which items are actually for your business use and which are primarily personal or vanish randomly as other members of the family keep needing them.
Utilities, Insurance, Etc.
You may receive year-end statements on these sorts of things, but if not, it’s easy enough to stick those paper bills in the same folder as your other tax stuff for easy reference when you need them. If you go paperless, that’s great. Just create a label in your Gmail or other email service called “Taxes (year)” or something along those lines, then apply it consistently to anything you might need to find again come tax time. Don’t forget things like the internet or cell phone bills if these are things you use for business. If you also use your internet and phone personally (and who doesn’t?), be prepared with a realistic estimate of what percentage of time goes to each.
Subscriptions and Books
If you read anything related to your profession, it’s the same as paying for an education and thus deductible. This doesn’t mean that James Patterson’s novel you picked up to read on the plane. It could include “Plumber’s Weekly” or “Writing For Fun And Profit.”
Advertising
If you do old school business cards, even if you got a great deal on 500 of them for $8 or whatever, that’s deductible. If you gave in and paid Facebook to promote a few posts related to your freelancing efforts, that’s deductible. If you order some cute pens or pencils with your logo on them or design your own coffee cups, lunchboxes, or t-shirts which you send out or give to customers on holidays, that’s tax-deductible.
Online Presence
If you have a company website or other online presence designed to promote your brand or your business, those costs are often deductible as well. Be realistic – not only do you want to remain audit-proof, but you want to be able to look yourself in the mirror with a minimum of shame and self-loathing. But don’t be afraid to claim legitimate deductions when you’re spending money to promote your efforts.
Conclusion
Like anything tax-related, the home office tax deduction can get a bit complicated depending on your specific circumstances. There’s no shame in hiring a professional if you think it’s worth it, but with a little preparation, you may be able to tackle it yourself as long as there’s nothing wildly unusual about your situation.
We’re also releasing a few re-imagined tax tools soon to help people just like yourself categorize expenses, compute deductions, and otherwise simplify the process for your personal or small business taxes. They’re flexible, but powerful, and designed to be intuitive and easy-to-use. (You shouldn’t need to enroll in a local community college just to figure out how a new phone app actually works.) Keep an eye out for these as well.
I’ll let you get back to whatever it is you’re doing to distract yourself these days, but don’t forget about your home office tax deduction or any of the other tax issues which will be here before you know it. Preparing a little bit as you go now will save you some pain and suffering – and maybe even some money – when it’s time.