Note: This post was originally published in May 2020. The below still has relevant information. For updated and additional information, please visit Working from Home? Is there a Tax Deduction?
Even if you always hire a tax preparer to do your taxes for you, you probably know that the most effective way of reducing your tax liability is through deductions and tax credits. Since one of the biggest deductions available is the one taken for home office space, in this strange and disorienting period of isolation due to the COVID-19 pandemic, many workers who’ve been told to work from home are wondering whether they’ll be eligible for that additional tax benefit.
Unfortunately, the Short Answer to That Question Is Probably “No”
Here’s why:
Millions of Americans have been asked to work from home as a result of Coronavirus and the need for social distancing. Though you may have rearranged your home in order to provide yourself with a dedicated space and workable environment, it’s unlikely that you’ll be able to write off the cost on your 2020 taxes, and that’s because there are specific criteria for qualifying for that credit, and being home from your job temporarily doesn’t rise to those requirements.
If you want to check yourself against the IRS rules, read the rules below for claiming the home office deduction:
- You must have an area of your home that is set aside for work, and only for work. People who qualify will have an office, pantry, small closet, sunroom, garage or other space that is used exclusively as workspace. Sitting at your kitchen island or setting up a desk in your bedroom does not qualify. The area cannot be used for any other purpose.
- You must be self-employed. Though there was a time when employees who worked at home were able to take the credit, that went away with passage of the Tax Cuts and Jobs Act. When that law was enacted, it eliminated employees’ ability to take deductions for miscellaneous itemized deductions – which is exactly the way that people who aren’t self-employed were able to deduct the costs of working from home. With the elimination of that ability, it makes no difference whether an employee is home temporarily because of the virus or has always worked from home, the deduction is not available.
If, based upon the criteria above, you do qualify for the home office deduction, there are a couple of ways to go about it. One is to use the simplified method, in which you simply calculate the square footage of the area in your home you’re using as an office and multiply it by $5 to determine your deduction. The maximum you can take is 300 square feet, or $1,500.
The other option is to add up both your direct and indirect home office expenses. This is much more complicated, and takes far more mental work, but it can yield a larger deduction—especially if you’re buying equipment (which counts as a direct expense that can be deducted in full). You add those purchases to a percentage of your indirect expenses reflective of the percentage of your home that your workspace takes up. Indirect expenses are the costs involved in simply keeping your home running (gas, electricity, and other costs that don’t pertain to your work but do make your workspace workable).
Important Takeaways
As tempting as it is to try to leverage the fact that you are home and use it towards next year’s tax filing, you can be sure that the IRS will be watching for it. Remember the following essential takeaways before you decide to take the deduction:
- The only taxpayers who can take it are those who are self-employed. Unless there is a change made to the tax code, employees will remain ineligible despite being required to work from home.
- If you’re calling it your office, make sure that it really is one. Sitting at the dining room table while your kids are getting online lessons next to you does not count.
- Track all expenses meticulously. That means every receipt—whether it is for equipment and office supplies or your monthly electric bill.
Even though you may not be able to use the fact that you’re working from home to get an extra deduction, that doesn’t mean that you can’t take advantage of it. Use your enhanced awareness and extra time (you’re no longer commuting, right?) to monitor your expenses and see what you can do to organize your receipts and pay attention to potential write-offs. The people who get the biggest tax refunds are the ones who pay attention, stay organized, and educate themselves about the possibilities.
Have any questions about the home office deduction or any other tax reduction strategies? Contact the Experts at Henssler Financial:
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- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166
- Join the Conversation in Our Coronavirus Facebook Group
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