Remote Work: Understanding Home Office Deductions
If current events completely changed what a day at work looks like for you, you’re not alone. Significant numbers of working adults have worked from home, to some extent, in the last year more than ever. Adapting to this new workspace isn’t easy, particularly with many companies choosing to alter compensation for employees.
And this may not be temporary. There's many companies discussing that the shift to work-from-home (WFH) or remote may be permanent for many. It's not just adults either. If you are one of the many newly working from home, it might make sense to assume that you’d qualify for a home office tax deduction. But in reality, this tax deduction can prove to be a bit tricky.
What Is a Home Office Deduction?
The home office deduction allows you to translate the expenses of using your home as an office into a tax benefit. In other words, it might take into account the fraction of space you use to work, mortgage interest or rent, insurance, utilities, repairs or depreciation. There are two primary requirements for individuals to qualify:
- Regular and exclusive use: The use of a portion of your home for business must be regular and exclusive. The work area cannot double as a personal space.
- Principal place of your business: Your home must be the principal location at which you conduct business.
This is meant to apply to self-employed individuals, not employees. Many freelancers, for instance, take home office deductions. The following are considered self-employed individuals:
- Sole proprietors and independent contractors
- Members of partnerships that carry on a trade/business
- Other individuals in business for themselves
Another way to look at this is how you get paid. If you have an employer who pays you and gives you a W-2 tax form every year, then you won't qualify for a home office deduction. In other words, most people, even those who work from home and have a home office, do not qualify for the home office deduction. You might be thinking that does not make sense. You are correct, but the IRS does many things that don't make sense.
Under Our Current Tax Policy
Despite increasing deduction amounts, many individual tax cuts were not included in the Tax Cuts and Jobs Act of 2017, such as home office deductions for employees. If you’re self-employed, chances are you may already be taking the deduction. If you’re a W-2 employee, however, it’s no longer possible. Unfortunately, that means a lot of folks transitioning to remote work cannot take the deduction. Remote employee tax deductions would be beneficial to many Americans, but at the moment it's not an option for most Americans.
What if I Qualify?
If you fit into the self-employed category described earlier, and you don’t already, you might be able to take advantage of the home office deduction.
The IRS offers two options to calculate your deduction: the regular method and the simplified option. The regular method requires you to compute your home office expenses. The new simplified option simply multiplies a prescribed rate by square footage, along with some other stipulations. Again, you’ll have to prove regular and exclusive use, as well as this being the principal place of your business to the IRS.
If you qualify for the deduction, it’s highly recommended that you consult a financial planner or tax professional. If you meet the requirements and do intend to file this provision on your taxes, it will be important to keep good records in the event you are ever audited.
Download: Questions to answer before thinking about a home office deduction
Should I make a home office to get the tax deduction?
No. If you happen to qualify for the deduction and have the space already, then consider taking the deduction. If you don't have office space, making a home office just for the deduction does not make sense. The deduction will very likely not pay for the expense. If there's other reasons for a home office, then by all means, embrace those reasons to carve out some space.
What is the difference between a tax credit and a tax deduction?
What if I Don’t Qualify?
Many Americans hoping to qualify for this deduction, unfortunately, won’t. Instead, consider the many amazing benefits of working remotely or from home. The lack of a commute alone is an incredible benefit for your mental health and gasoline budget. Focus on the positive while you make a living in your favorite slippers. While tax deductions for working from home would be great, cherish the other non-tax benefits.
There’s some more hope, too, for employees who don’t qualify for the home office deduction. Check if your state deducts unreimbursed business expenses from your state income tax. Some states may deduct expenses for home offices if certain requirements are met.
"My people will abide in a peaceful habitation, in secure dwellings, and in quiet resting places." Isaiah 32:18 ESV
What happens when work and school all happen at home?
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