Tax Deductions For Working From Home
As remote work becomes increasingly common, the topic of tax deductions for home office expenses has garnered significant attention. You might have heard anecdotes from other remote workers about the tax benefits they’ve enjoyed by deducting home office expenses.
However, let’s move past anecdotal accounts and delve into the specifics of whether you qualify to save money through home office deductions and, if eligible, what types of expenses you can claim.
What are WFH Tax Deductions?
Deductible Work from Home (WFH) expenses are business-related costs that can be subtracted from your income, thereby lowering your tax liability.
These expenses encompass items for your home office, including furniture, electronics, and stationery. Additionally, they extend to utilities associated with heating, cooling, lighting, and internet usage in your workspace.
Who’s Eligible?
WFH tax deductions are typically available to business owners and self-employed individuals, rather than W2 employees who receive regular wages or salaries from their employers. In most cases, W2 employees who transitioned to remote work voluntarily are not eligible for these deductions unless there are exceptional circumstances.
Making Your Space Deductible Friendly
If you have both a W2 job and a side business and work from home, your eligibility for home office deductions hinges on whether you maintain separate workspaces for each job. While it might seem cost-effective to use your W2 workspace for your side hustle, doing so disqualifies you from claiming a tax deduction for your home office.
It’s generally advisable to set up a dedicated home office tailored to the specific needs of your business if you aim to maximize deductible expenses. Even if you’re self-employed only part-time, you can still claim a partial deduction for your home office, provided it meets professional standards.
If your workspace occupies a corner of your living room or home gym, strive to keep it organized and dedicated solely to work. Maintaining a distinct and functional home office space simplifies calculations, such as determining square footage and utility expenses, when tax season rolls around.
How Do WFH Deductions Work?
It’s important to understand that WFH deductions don’t function like tax credits. Simply having $5,000 in business expenses won’t automatically reduce your tax bill by $5,000. Instead, your taxable income will be decreased by the amount you claim.
Remember, the size of your deduction will largely correlate with your business income for the year. For instance, if you’re a freelance graphic designer aiming to deduct $10,000 in expenses but only earned $7,000 throughout the year, your deduction may be significantly lower than anticipated.
Getting Organized
If you’re running a legitimate business or freelancing from home, you have a valuable opportunity to reduce your tax burden through these deductions. However, it’s essential to maintain meticulous records of the expenses you intend to claim.
While it might seem excessive to document every business-related expense preemptively for potential audits, that’s precisely what the IRS advises. They recommend retaining both physical and digital proof-of-payment for all work-from-home expenses and organizing them systematically for quick reference.
In instances where receipts are missing or misplaced, it’s advisable to make detailed notes regarding the date, cost, and parties involved in the transaction.
Simple Vs. Regular Method
When it comes to claiming your WFH deductions, you have two options: the simplified method and the regular method. The simplified method allows eligible individuals to deduct $5 per square foot of their office space, up to 300 square feet, resulting in a maximum deduction of $1,500.
Conversely, the regular method demands more comprehensive information. This includes determining the percentage of your home used for business, calculating depreciation for that specific portion, and maintaining meticulous records of all your expenses.
Which Method Is Better?
The simplified method often appeals to many eligible workers because of its simplicity. Tax season can be stressful enough! However, for those who are inclined towards numbers and are committed to maximizing their tax savings, the regular method may offer greater deductions.
Unlike the simplified method, which can be completed as you calculate your income, the regular method demands ongoing effort before filing your taxes. While keeping track of expenses and conducting a more detailed assessment of your home office may seem daunting, the regular method has no maximum deduction limit – a significant advantage. Additionally, it enables you to carry over any unused business expenses from the previous tax year.
Calculate Before You Choose
If tax season is a headache for you, opting for the simple method is understandable. However, if the potential savings from the regular method are substantial, it might be wise to calculate totals from both methods to determine the best approach for you!
Once you’ve made your choice, it’s important to stick with it. You can’t switch between methods within the same tax year. Even transitioning from the simplified method in one year to the regular method in another requires additional steps, like calculating depreciation deductions for the subsequent year.
Tip For W2 Employees
Even if W2 employees aren’t eligible for WFH deductions, there are still avenues for savings. Some employers offer reimbursement plans where you log expenses for business purchases. Getting reimbursed promptly beats waiting months for a deduction on the same expense.
Be Honest
When it comes to claiming expenses, honesty is key. While it might be tempting to justify deducting items like a Nintendo Switch as stress reducers that enhance productivity, it’s important to be honest about their business necessity. Ask yourself if the item is genuinely essential for your work. Claiming only items exclusively used for business purposes helps avoid any confusion or suspicion about your deductions.
