Top 10 Home Office Deductions That Lower Tax Rates

31 Mar

Many taxpayers are reluctant to take the home office tax deduction because they fear it will result in an audit or increased scrutiny from the IRS. While this is absolutely a possibility, particularly if you take large deductions, if you stick to the standard deductions that you are entitled to receive, it should not result in an audit.

Due to changes in the Tax Cut and Jobs acts there are fewer deductions available and the standard deduction was nearly doubled, however there are still many self-employment deductions that you can take to help lower your tax rate.

One of the first things you should do is review the IRS publication 587 to make sure that you qualify and determine what home office expenses you can write off. Permissible expenses are covered in IRS form 8829, this form will need to be filed with your taxes in order to claim your home office deductions.

Deductible Expenses

There are two types of expenses when it comes to home office deductions, direct and indirect expenses. Here’s a quick overview of these two types of expenses:

  • Direct Expenses: These types of expenses only relate to the area that is designated as your home office and are used exclusively for business purposes. As an example, painting your home office, wall repairs or other maintenance that only applies to your home office area would be deductible.
  • Indirect Expenses: These types of expenses involve your entire home. As an example your utility bill, this cost does not relate directly to your home office but instead your entire home. These expenses can be deducted as a percentage of your home that is used for your business. If your home office takes up 15% of the square footage of your home you can deduct 15% of all your indirect expenses.

Here is a list of the most common indirect expenses related to a home office You can find a description of these expenses and others in IRS Publication 587 and Form 8829:

  • Mortgage Interest: The details on this particular deduction can be found in IRS Publication 936, “Home Mortgage Interest Deduction.” This document provides details for calculating your mortgage interest deduction. It should be noted that if you purchased your home before December 16th, 2017 this deduction is limited to interest on mortgages below $1,000,000. This deduction amount was lowered to $750,000 for mortgages taken out after December 15th, 2017. 

The new law only allows interest on a home equity debt to be deducted if it was taken out to buy, build or substantially enlarge your home. Mortgage insurance premiums can also be deducted but that deduction has been eliminated for premiums that occurred after 2019. 

  • Real Estate Taxes: The IRS Publication 530 “Tax Information for Homeowners.” Is the document you want to review for information regarding real estate tax deduction. This particular deduction is now limited to $10,000 for state and local taxes for married taxpayers filing jointly, or $5,000 for single taxpayers and those married couples who file separately.
  • Casualty Losses: Casualty losses from storms, fire, wind damage and other covered losses can be deducted as either direct or indirect expenses depending on what type of loss you experienced. Under the Tax Cuts and Jobs Act, this deduction is now only available for losses that occurred during a presidentially declared disaster.         
  • Utilities and Services: It is possible to deduct a percentage of your household expenses. This can include gas, water, trash and cleaning as well as electricity. Be careful to keep the percentage in line, deducting 90 percent of your household bills will raise a red flag. In most cases, lawn services and other outdoor services cannot be deducted. 
  • Repairs: Repairs to your home can be deducted in the proper percentage. This can include such things as roofing repairs, HVAC systems and even plumbing issues. Again, be careful to deduct them in the proper percentage so as not to trigger the IRS. 

There is a difference between repairs and home improvements. While repairing your HVAC is deductible, replacing the entire system is considered an upgrade and would not be deductible in many cases. 

  • Depreciation: Depreciation of your home is also deductible, and the IRS Publication 587 can help you determine the cost basis for your home depreciation. 
  • Homeowners insurance: Your homeowners insurance premium can be deducted but you must stick to a square footage percentage. If you try to deduct the entire amount or a large percentage of your insurance bill the IRS may want to look into it more deeply. Always keep your percentages accurate. 
  • Rent: Rent can also be deducted if you are working out of an apartment or rental home. You must use the square-footage percent calculation to get the right deduction amount.
  • Security System: If you have a home security system installed you can deduct the cost of installation and monitoring on a square footage basis. 

Flat Deduction

It is also possible to take a simplified deduction of $5 per square foot of office space. There is a cap of 300 square feet so a total of $1,500. If you choose the standard deduction instead of itemizing, you will not be allowed to deducted business expenses that relate directly to your home office. However, you can deduct items such as supplies and equipment depreciation. 

As always, if you are uncertain that something is deductible or are uncomfortable with some of your deductions, contact a tax professional for advice before filing. 

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