How do I claim my homeowners insurance as a tax deduction?
It has always been possible as a homeowner to reduce your taxable income by deducting your property taxes and the mortgage interest you paid over the year. However, it may also be possible to deduct other home expenses, including your homeowners insurance premium (or at least a portion of it) if you are self-employed and work from home.
Is homeowners insurance tax deductible?
In most situations, the answer to this question is a big no. If you are an employee that receives a W-2 from your employer, deducting your home office expenses is not a possibility due to the Tax Cut and Jobs Act.
On the other hand, if you are self-employed and use part of your home as an office you may be able to deduct a portion of your homeowners insurance premium.
How do I claim my homeowners insurance as a deduction?
In order to deduct a portion of your homeowners insurance you must meet specific IRS requirements. The IRS requires that you must have a space in your home that is used exclusively and regularly for business purposes. This means that your home office must only have one function, it is an office, not a spare bedroom, a playroom or even just a junk room that your work in from time to time. Unless it is a dedicated office, it will not qualify.
If you meet this requirement, there are two methods to deduct your homeowners insurance costs for your home office, the regular method and the simplified method. Here is a breakdown of both:
Simplified method
This method allows you to deduct a total of 300 square feet at $5 a square foot so a total deduction of $1,500. This total must be pro-rated if you don’t use the space as an office for the entire year. Once you have calculated your deduction it should be entered on Schedule C tax form.
Regular method
This method is more complicated and involves direct and indirect expenses.
Direct expenses: These are expenses that are related exclusively to your business. This can include items such as painting your office, a separate phone line, and even replacing the carpet. These expenses are 100 percent deductible, but this category does not include insurance.
Indirect expenses: These expenses aren’t directly related to your business. This includes costs such as your mortgage, utilities and other expenses such as homeowners insurance. In order to deduct these expenses using the indirect method means that you will need to calculate the percentage of your home that the office takes up.
To find this number, divide the square footage of your home office by the total square footage of your home. As an example, if your office is 200 square feet and your home’s total square footage is 2,500 the percentage you can deduct 8 percentage of your homeowners insurance cost. If you go this route, you will need to fill out Form 8829 and then you can transfer the amount to Schedule C.
The simplified method certainly makes it easier to calculate your deduction but if you have lots of expenses that you are qualified to deduct, the regular method is probably the best route to go.