Your Guide to Maximizing Home Office Tax Deductions

With the rise of remote work, many individuals now have dedicated office spaces in their homes. If you fall into this category, it’s essential to explore whether you qualify for a work from home tax deduction. This guide will help you understand the requirements, benefits and strategies for maximizing your home office deductions.

Understanding home office tax deductions 

A home office tax deduction allows you to write off certain expenses related to the business use of your home. These deductions can include real estate taxes, mortgage interest, rent, utilities, home insurance, and repairs. To qualify, you must meet specific criteria set by the IRS. 

Key requirements from IRS rules 

1. Exclusive use: You must use a portion of your home exclusively for conducting business activities on a regular basis. 
2. Principal place of business: This location must be your principal place of business. 

There are some exceptions to these rules. Two common ones are that you can qualify if you use part of your home for storing inventory (without the area being exclusively used for business) or if you have an area you use to meet clients (even if it’s not your principal place of business). The rules are tricky, so we recommend talking to a tax advisor.

Employment status and eligibility 

Your eligibility for work from home deductions depends on your employment status: 

• W-2 employees: If you're a remote employee who receives a W-2 from your employer, you can no longer claim a home office deduction even if you have unreimbursed expenses for business use of your home. 
• Self-employed individuals: If you are self-employed, such as an independent contractor filing a 1099 tax form, or another type of small business owner, you can claim home office deductions. 

Non-deductible expenses 

Certain expenses are not deductible, such as costs for parts of your home not used for business. For example, lawn care or painting a room not used for business purposes cannot be deducted. 

Calculating your work from home deduction

There are two methods to calculate your home office deduction: 

1. Actual expenses: This involves dividing home expenses between personal and business use. Most commonly, you’ll calculate the percentage of the square footage in your home used for business and apply that percentage to your actual total home expenses. Note that the square footage used for business doesn’t have to be attached to your main living space to qualify. For example, you might use a separate structure like a standalone garage or a shed.
2. Simplified method: This uses a prescribed rate of $5 per square foot of the portion of the home used for business, up to a maximum of 300 square feet. The maximum deduction under this method is $1,500. You won't need to calculate your actual expenses.

Regardless of the method, you can only deduct home office expenses up to your business’s net income (revenues minus other expenses). If you’re using actual expenses to calculate your deduction, any excess can be carried over to the following year.

Common work from home expenses

Here are some common expenses you can deduct if you qualify for the home office deduction: 

• Mortgage interest: This expense can be included as an itemized deduction for many homeowner who aren’t business owners, so calculating how much to include as a business expense can be tricky. 
• Rent: If you're a renter, deduct the portion of your rent that applies to your home office. 
• Utilities: Deduct a portion of your utility bills, such as electricity, water, and gas. 
• Home insurance: Deduct the portion of your home insurance that applies to your home office. 
• Repairs: Deduct expenses for repairs that keep your home office in good working order.
• Office supplies: Deduct the cost of office supplies used for business purposes. 
• Phone service: If you have a second phone line for your office, or if you use your primary phone line for business-related long-distance calls, you can deduct those expenses. However, they’re reported separately from your home office expenses.
• Depreciation: Deduct the depreciation of the portion of your home used for business. 
• Home office furniture and equipment: The cost of furniture and equipment used exclusively in your home office workspace is generally deductible. This can include items like desks, chairs, filing cabinets, and computers. You may be able to deduct the full cost in the year of purchase or depreciate the cost over time, and these expenses are generally deductible even if you don’t qualify for the “business use of home” deduction.
• Home office safety measures: Expenses related to making your home office safer, such as installing a security system, may be deductible. These improvements not only protect your business assets but also contribute to the overall safety of your home. 

Partnering with a tax professional 

Navigating home office tax deductions can be complex. Smart taxpayers should consider partnering with a CPA or tax professional who can help you understand your specific needs and help ensure you maximize deductions and other tax breaks on your tax return, ultimately reducing your taxable income and tax liability. They can also help you navigate the nuances of tax laws and provide personalized advice based on your financial circumstances. 

Your checklist for home office deductions 

1. Virtual office considerations: With the rise of virtual offices, it's important to note that you may still qualify for home office deductions even if you occasionally work outside your home. The key is that your home office must be your principal place of business and used regularly and exclusively for work. 
2. Direct vs. indirect expenses: When claiming home office deductions, it's crucial to understand the difference between direct and indirect expenses. Direct expenses are fully deductible and relate specifically to the home office area. Indirect expenses, such as utilities and insurance, are deductible based on the percentage of your home used for business. 
3. Impact on capital gains: Be aware that claiming a home office deduction may affect your capital gains tax when you sell your home. 
4. State-specific considerations: While federal tax laws apply uniformly, state tax laws regarding home office deductions can vary. Some states may offer additional deductions or have different requirements. It's important to research your state's specific tax laws or consult with a local tax professional. 
5. Recordkeeping best practices: Maintain a detailed log of your work hours in your home office and keep all relevant receipts and documents. Consider using digital tools or apps to track expenses and time spent working from home, which can simplify the process of calculating deductions. 
6. Energy-efficient improvements: If you make energy-efficient improvements to your home office, such as installing additional insulation or energy-efficient windows, you may be eligible for additional tax credits beyond the standard home office deduction. 

We can help

If you have questions about home office tax strategies, partner with your tax professional and one of our financial planners so you can discuss tax solutions in the context of your full financial picture.

Neither Edelman Financial Engines nor its affiliates offer tax or legal advice. Interested parties are strongly encouraged to seek advice from your qualified tax and/or legal professionals to help determine the best options for your particular circumstances.