Home Office Tax Deductions: What Can (And Can’t) You Write Off?

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Millions of employees work from home at least part time. They’ve carved out dedicated office space and plopped laptops on kitchen counters and in closets. They almost never can declare the home office tax deduction.

Millions of self-employed people have also created workspaces at home. If they use that part of their home exclusively and regularly for conducting business, and the home is the principal place of business, they may be able to deduct office-related business expenses.

Why the difference? The Tax Cuts and Jobs Act nearly doubled the standard deduction and eliminated many itemized deductions, including unreimbursed employee expenses, from 2018 to 2025.

What Is a Home Office Tax Deduction?

The home office tax deduction is available to self-employed people — independent contractors, sole proprietors, members of a business partnership, freelancers, and gig workers who require an office — who use part of their home, owned or rented, as a place of work regularly and exclusively.

“Home” can be a house, condo, apartment, mobile home, boat, or similar property, and includes structures on the property like an unattached garage, studio, barn, or greenhouse.

Eligible taxpayers can take a simplified deduction of up to $1,500 or go the detailed route and deduct office furniture, homeowners or renters insurance, internet, utilities needed for the business, repairs, and maintenance that affect the office, home depreciation, rent, mortgage interest, and many other things from taxable income.

After all, reducing taxable income is particularly important for the highly taxed self-employed (viewed by the IRS as both employee and employer.)

An employee who also has a side gig — like driving for Uber or dog walking — can deduct certain expenses from their self-employment income if they run the business out of their home.

Am I Eligible for a Home Office Deduction?

People who receive a W-2 form from their employer almost never qualify.

In general, a self-employed person who receives one or more IRS 1099-NEC tax forms may take the home office tax deduction.

Both of these must apply:

  • You use the business part of your home exclusively and regularly for business purposes.
  • The business part of your home is your main place of business; the place where you deal with patients or customers in the normal course of your business; or a structure not attached to the home that you use in connection with your business.

Regular and Exclusive Use

You must use a portion of the home for business needs on a regular basis. The real trick is to meet the IRS standard for the exclusive use of a home office. An at-home worker may spend nine hours a day, five days a week in a home office, yet is not supposed to take the home office deduction if the space is shared with a spouse or doubles as a gym or a child’s homework spot.

There are two exceptions to the IRS exclusive-use rules for home businesses.

  • Daycare providers. Individuals offering daycare from home likely qualify for the home office tax deduction. Part of the home is used as a daycare facility for children, people with physical or mental disabilities, or people who are 65 and older. (If you run a daycare, your business-use percentage must be reduced because the space is available for personal use part of the time.)
  • Storage of business products. If a home-based businessperson uses a portion of the home to store inventory or product samples, it’s OK to use that area for personal use as well. The home must be the only fixed location of the business or trade.

Principal Place of Business

Part of your home may qualify as your principal place of business “if you use it for the administrative or management activities of your trade or business and have no other fixed location where you conduct substantial administrative or management activities for that trade or business,” the IRS says.

Can You Qualify for a Home Office Deduction as an Employee?

Employees may only take the deduction if they maintain a home office for the “convenience of their employer,” meaning the home office is a condition of employment, necessary for the employer’s business to function, or needed to allow the employee to perform their duties.

Because your home must be your principal place of business in order to take the home office deduction, most employees who work part-time at home won’t qualify.

Can I Run More Than One Business in the Same Space?

If you have more than one Schedule C business, you can claim the same home office space, but you’ll have to split the expenses between the businesses. You cannot deduct the home office expenses multiple times.

How to Calculate the Home Office Tax Deduction

The deduction is most commonly based on square footage or the percentage of a home used as the home office.

The Simplified Method

If your office is 300 square feet or under, Uncle Sam allows you to deduct $5 per square foot, up to 300 square feet, for a maximum $1,500 tax deduction.

The Real Expense Method

The regular method looks at the percentage of the home used for business purposes. If your home office is 480 square feet and the home has 2,400 square feet, the percentage used for the home office tax deduction is 20%.

You may deduct 20% of indirect business expenses like utilities, cellphone, cable, homeowners or renters insurance, property tax, HOA fees, and cleaning service.

Direct expenses for the home office, such as painting, furniture, office supplies, and repairs, are 100% deductible.

Things to Look Out for Before Applying for the Home Office Tax Deduction

If you’re an employee with side gigs or just self-employed, it might be a good idea to consult a tax pro when filing.

To avoid raising red flags, you may want to make sure your business expenses are reasonable, accurate, and well-documented. The IRS uses both automated and manual methods of examining self-employed workers’ tax returns. And in 2020, the agency created a Fraud Enforcement Office, part of its Small Business/Self-Employed Division. Among the filers in its sights are self-employed people.

The IRS conducts audits by mail or in-person to review records. The interview may be at an IRS office or at the tax filer’s home.

A final note: Taking all the deductions you’re entitled to and being informed about the different types of taxes is smart.

If you’re self-employed, you generally must pay a Social Security and Medicare tax of 15.3% of net earnings. Wage-earners pay 7.65% of gross income into Social Security and Medicare via payroll-tax withholding, matched by the employer.

So self-employed people often feel the burn at tax time. It’s smart to look for deductions and write off those home business expenses if you’re able to.

To shelter income and invest for retirement, you might want to set up a SEP IRA if you’re a self-employed professional with no employees.

The Takeaway

If you’re an employee working remotely, the home office tax deduction is not for you, right now, anyway.

If you’re self-employed, the home office deduction could be helpful at tax time. To qualify for the home office deduction, you must use a portion of your house, apartment, or condominium (or any other type of home) for your business on a regular basis, and it generally must be the principal location of your business. This is something to keep in mind if you’re in the market for a new home, since writing off a portion of your home expenses could help offset some of the costs of homeownership.

This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.


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5 Ways to Get Your Finances in Check in 2024

5 Ways to Get Your Finances in Check in 2024

A Money Girl podcast listener named Piper says, “I’m a big fan of your podcast and want some advice before moving forward with my finances. I’m 23 years old, just started my first job, and make $60,000 with an extra $9,250 as reimbursement for traveling full-time. I have student debt and really want to get rid of it. But I also want to contribute to a Roth, save for emergencies, and buy a car. My company matches up to 6% on retirement contributions, so I was planning on contributing that much and paying off my loans at the same time. What do you think my financial plan should be?”

Thanks for your question, and congrats on landing your first job, Piper! We all have limited financial resources to manage, so knowing what to prioritize is critical for achieving your goals as quickly as possible. As we settle into 2024, it’s the perfect time to create or revisit your financial plan.

This article (and podcast episode) will guide you when you’re unsure what to do with your money or are trying to make the best financial decisions this year. 

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While getting out of debt is always a wise financial goal, I encourage you to prioritize it in the context of your entire financial life. In some cases, aggressively paying down debt ahead of schedule is the wrong financial move. First, carefully consider how much emergency money you should have and how that stacks up with what’s actually in the bank. 

A cash reserve should be your top financial priority because it keeps you from going into debt if you unexpectedly lose your job or business income or have significant unexpected expenses, like medical bills or car repairs.

How much emergency savings you need is different for everyone. For instance, if you’re the sole breadwinner for a large family, you may need a bigger financial cushion than a single person with no dependents.

A good rule of thumb is to accumulate at least 10% of your annual gross income. For instance, since Piper earns $60,000, she could aim to maintain at least $6,000 in her emergency fund. 

Another way to determine your target savings is by basing it on your average monthly living expenses. For instance, add your costs and bills, such as food, housing, utilities, insurance, and transportation. Then multiply the total by a reasonable period, such as from three to six months. 

For example, if your monthly living expenses are $3,000 and you want a minimum three-month reserve, you need a cash cushion of $9,000. Or double that amount for a six-month fund. 

If you’re struggling to build savings, you might start with a small goal, such as setting aside 1% of your income or $500 by a specific date. Then increase your goal annually until you reach a healthy reserve balance.

Even if you can only save a small amount each month, I always say that starting small is better than not starting at all! Consider automating your goal with a recurring transfer from your checking to your savings every week or month. After a while, you might not even miss the money. 

Remember that your financial well-being depends on having cash to meet living expenses in an emergency, not on paying a lender ahead of schedule. So, Piper, your homework is to determine how much emergency savings you need and set a goal to fill any gap as quickly as possible. 

Note that your emergency money should never be invested because that exposes it to risk. Its purpose is safety, not growth. So, please keep it in an FDIC-insured high-interest savings account where it won’t lose value and will be sitting there when you need it.

To sum up, your first step in creating a financial plan is ensuring you have enough cash. Anytime you’re unsure about a financial decision or what to do with your money, ask yourself, “Do I have the right amount of emergency money in the bank?” If not, that should be your number one priority.  

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If you’re dealing with financial hardship and have dangerous debts, handle them next. Piper didn’t mention having any, but I know some of you may be struggling with overdue bills, debt in collections, tax liens, or debt balances with double-digit interest rates. Getting caught up or immediately addressing them is critical because they can destroy your financial health. 

Note that you shouldn’t pay off low-interest debts, such as student loans and mortgages, ahead of schedule because they’re relatively inexpensive and come with tax deductions. Please save that step for later in your financial plan after you’ve taken care of the essentials.

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Once you have enough emergency money or regular savings and tackle any dangerous debt, your next priority is investing for retirement. 

Consider this: If you invest $500 a month for 40 years with an average 7% return, you’ll have an impressive retirement nest egg of over $1.3 million! But if you focus on paying off debt ahead of schedule and don’t start investing until a decade before retirement, you’d have to invest over $7,500 a month to have $1.3 million in the bank. 

In the first scenario, where you start investing early, you end up with $1.3 million by socking away a total of $240,000 over four decades. But the second scenario, where you start late, requires you to save $900,000 over a short period to have $1.3 million for retirement.

In other words, by investing early, you achieve the same financial goal but spend $660,000 less! That’s some serious savings you don’t want to miss. Investing small amounts over a long period allows you to fully leverage the effects of compounding, where you earn interest on your accumulated growth.

So, if you take one lesson from this show, it’s that not procrastinating your investing makes the difference between scraping by or having a comfortable lifestyle down the road.

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A good rule of thumb is to invest at least 10% to 15% of your gross income for retirement as soon as you begin your career and have reasonable emergency savings in the bank. Remember that investments don’t count as your cash reserve because they’re not entirely liquid and get exposed to short-term risk. 

For example, if you’re like Piper and earn $60,000, make a goal to contribute at least $6,000 annually to a tax-advantaged retirement account, such as an IRA, or a retirement plan at work, such as a 401(k) or 403(b). 

Piper, you mentioned getting a 6% match on your workplace retirement contributions, which is fantastic. Always contribute enough to max out an employer match. However, I recommend you bump it up and contribute at least 10% per year to your workplace Roth.

You can contribute up to $22,500, or $30,000 if you’re over age 50, to a workplace retirement account. Anyone with earned income (even the self-employed) can contribute up to $6,500, or $7,500 if you’re over 50, to an IRA starting next year. 

Those increased limits are just some retirement account changes I covered in a previous show. So be sure to check it out if you missed the previous podcast, episode 754.

The sooner you make maxing out a retirement account a habit, the better. Starting to invest early is like getting your retirement on sale because you contribute less and still see your account value mushroom over time–brilliant!

adamkaz

An essential part of taking control of your finances is having adequate insurance. Many people get into debt in the first place because they don’t have enough of the right kinds of coverage—or they don’t have any insurance at all.

Make sure you have health insurance to protect yourself and those you love from an illness or accident jeopardizing your financial security. Also, review your auto and home or renters insurance coverage. And by the way, if you rent and don’t have renters insurance, you need it. It’s a bargain for the protection you get; it only costs $185 per year on average.

And if you have family who would be financially hurt if you died, you need life insurance to protect them. If you’re in relatively good health, a term life insurance policy for $500,000 might only cost a couple of hundred dollars per year.

An often-overlooked coverage is disability insurance, which replaces a portion of your income if you get sick or injured and can’t work. You’re actually more likely to have a disability that prevents you from working than to die.

Piper, if you get these coverages through work, that’s terrific. However, if you don’t have employer-provided insurance or are self-employed, purchase these critical products on your own. It’s always a good idea to review your needs with a reputable insurance agent or a financial advisor.

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Once your savings, retirement, and insurance needs are on autopilot and you have money left over, it’s time to reach other financial goals. Piper mentioned wanting to buy a car and repay her student loans early.

Remember that student loans and mortgages come with relatively low interest rates and tax deductions, making them cost even less on an after-tax basis. That’s why debts with higher interest and no money-saving tax deductions, such as credit cards, personal loans, and auto loans, should typically get paid off first.

The bottom line is that goals outside of saving for emergencies and investing for retirement are wonderful if you can afford them. Make a list of your financial dreams, what they cost, and how much you can afford to spend on them each month.

So, before you rush to prepay a student loan or mortgage, make sure there isn’t a better use for your money. Being completely debt-free is a terrific goal—but keeping inexpensive debt and investing your excess cash for higher returns can make you wealthier in the long run.

Piper, I hope these five steps give you and everyone reading this clarity about creating a personal financial plan. In general, or if you’re trying to set financial New Year’s resolutions for yourself this time of year, following these steps will help you make the most of your money, protect it, and build wealth for a secure future.

This article originally appeared on QuickandDirtyTips.com and was syndicated by MediaFeed.org.

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