Salaried Workers: Claim Home Office Tax Breaks?

Salaried employees are no longer allowed to claim the home office deduction on their federal tax returns. The Tax Cuts and Jobs Act eliminated the home office deduction for employees from 2018-2025. The deduction remains available if you're self-employed or a small business owner using part of your home for business activities.

Prior to 2018, employees could deduct unreimbursed employee business expenses, including the home office deduction if eligible, as miscellaneous itemized deductions on Schedule A. However, tax reform has eliminated the itemized deduction for employee business expenses for tax years 2018 through 2025. As a result, employees may not claim a home office deduction during these years.

The home office deduction is a valuable tax break for self-employed individuals and small business owners who use a portion of their home for work. It allows them to subtract the costs of home office expenses from their income, thereby lowering their overall tax liability for the year.

Home office expenses can be deducted if you work for yourself or have a W-2 job

Home Office Expenses: What You Need to Know

Working from home has become increasingly common, but can you claim tax deductions for your home office? The answer depends on your employment status.

Self-employed or Small Business Owner

If you're self-employed or a small business owner, you may be able to claim tax deductions for your home office expenses. This includes freelancers and independent contractors. To qualify, you must use your home office:

• Exclusively and regularly for business purposes
• As your main place of business
• To meet or deal with patients, clients, or customers
• For administrative or management activities, if there's no other fixed location for these tasks

In addition, your home office space must not be used for any personal purposes and must not contain personal-use furnishings.

W-2 Employee

If you're a W-2 employee, you generally cannot claim tax deductions for your home office expenses. However, if you have a side gig or freelance work unrelated to your W-2 job, you may be able to claim deductions for the space dedicated to that work. It's important to note that the space used for your side gig cannot be the same space used for your W-2 job.

Calculating Deductions

There are two methods to calculate your home office tax deduction:

• Simplified Method: You can deduct $5 per square foot of your home office space, up to 300 square feet or $1,500.
• Actual Expenses Method: You can deduct a portion of your actual home-related expenses, such as mortgage interest, property taxes, insurance, utilities, repairs, and depreciation.

When deciding which method to use, consider which option will provide you with the largest tax deduction. Additionally, keep in mind that the actual expenses method requires more record-keeping and calculations.

Record-Keeping

Regardless of the method you choose, it's important to maintain thorough records and save receipts for any expenses you plan to claim as deductions. This includes keeping a written record or log book of your expenses and proof of payment, such as credit card statements, canceled checks, or itemized receipts.

State-Specific Deductions

While federal tax laws do not allow W-2 employees to claim home office deductions, some states may have different rules. For example, Pennsylvania and New York allow employees to deduct some unreimbursed expenses. Be sure to check your state's tax rules to see if you're eligible for any additional deductions.

Keep records and save receipts for tax purposes

Keeping records and saving receipts is essential for tax purposes. The IRS requires you to keep financial records and documentation supporting any income, deductions, or credits you report on your tax return. This includes deposit information, cancelled cheques, credit card receipts and statements, petty cash slips, and other proof of payment.

It's important to keep these documents organised and safe. Using file folders is an effective way to stay organised. Label folders with categories such as Income, Banking Info, Child Care Receipts, and Charitable Donations. You can also scan or photograph your documents and save them digitally. Use a receipt-tracking app to keep your digital files orderly.

Additionally, make it a habit to write notes on your receipts, including the amount, location, date, and type of expense. This is especially important for business lunches or meetings with potential vendors.

In terms of how long to keep records, the general rule of thumb is to retain tax records and receipts for three years after filing your tax return. However, there are some exceptions to this rule. For example, if you have employee records, keep employment tax records for at least four years. If you omitted income from your return, keep records for six years. If you deducted the cost of bad debt or worthless securities, keep records for seven years.

It's also worth noting that while the IRS requires receipts for certain expenses, there are situations where receipts may not be necessary. For expenses under $75, you may not need a receipt as long as you can provide information on where and when the expense occurred and what it was for. However, for business travel, meals, and gifts, it is recommended to keep receipts for any expenses over $75.

Simplified home office deduction: $5 per square foot, up to $1,500

The simplified home office deduction is a method to ease your record-keeping when calculating your home office deduction. With the simplified method, you aren't deducting actual expenses. Instead, the square footage of your home office space is multiplied by a prescribed rate. The rate is $5 per square foot for up to 300 square feet of space, with a maximum deduction of $1,500 per year. This method can only be used for offices up to 300 square feet.

If you only use the space part-time, you will need to prorate the amount. To calculate the average monthly square footage for a particular tax year, add up the amount of square feet used each month and divide that number by 12.

The simplified method can be beneficial if you are pressed for time or unable to calculate your actual expenses. However, the regular direct method may result in a larger deduction. This method requires you to track all your home office expenses, including any costs for repairing and maintaining the space. You can also claim deductions for a portion of other expenses, such as rent or property taxes, home depreciation, and utilities, based on the proportion of the space to the rest of your house.

Regular direct home office deduction: track all expenses, including repairs and maintenance

The regular direct home office deduction method requires you to track all your home office expenses, including any costs for repairing and maintaining the space. This method can result in a larger deduction compared to the simplified method.

To calculate the deduction, you must first determine the percentage of your home devoted to your business activities. This is done by dividing the square footage of your home office by the total square footage of your home.

Once you have the percentage, you can apply it to your home expenses to determine the amount that can be claimed as a business expense. This includes rent or mortgage payments, utilities, insurance, repairs, and depreciation.

It is important to note that you can only deduct the portion of expenses that are related to your business use of the home. For example, if you use your home office for both business and personal purposes, you can only deduct the percentage of expenses that are allocated to the business use.

Additionally, you can deduct the full amount of any direct expenses that are solely for your home office, such as painting or repairs done only in that area.

Make sure to keep detailed records of all the expenses you plan to claim as deductions, including receipts, bills, and other relevant documentation. This will help you substantiate your claims in case of an audit by the IRS.

Self-employed individuals may deduct a portion of home-related expenses

Self-employed individuals may deduct a portion of their home-related expenses, but there are some conditions. First, the home office space must be used exclusively and regularly for business purposes. This means that the space cannot be used for personal purposes and must be used frequently for work.

Second, the home office must be the individual's main place of business. This means that the space is used for the majority of business activities, such as meeting clients or conducting administrative tasks.

If these conditions are met, self-employed individuals can deduct a portion of their home-related expenses, such as:

• Mortgage interest or rent
• Utilities (gas, electricity, water, internet, phone bills)
• Council tax
• Repairs and maintenance
• Home insurance

Frequently asked questions