Woman working at home talks to virtual assistant
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Millions of Americans began working remotely, or from home, during the coronavirus pandemic.
Others decided to take the plunge amid the “Great Resignation” and start their own business and become their own boss in 2021.
But who can claim the home office deduction?
As a general rule, those who are self-employed and work from home may qualify for the tax credit. Individuals who work remotely but receive a W-2 tax form from their employer do not qualify.
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“Knowing you’re not a 9-to-5 [worker] If you’re eligible, you can now claim the home office deduction, said Sheneya Wilson, CPA and founder of Fola Financial in New York, adding that it’s one of the biggest deductions people take from working from home.
Who can claim the deduction?
There are some parameters when it comes to who qualifies for the home office deduction, even though millions of Americans have been working from home in 2021 due to the ongoing coronavirus pandemic.
The tax break generally applies only to self-employed, gig workers, or independent contractors, not to those employed by a company that grants them a W-2 tax season.
“Employees who receive a paycheck or W-2 solely from an employer are not eligible for the deduction, even if they currently work from home,” the IRS said in a September 2020 reminder on the home office deduction .
Confusion can arise as the home office deduction was previously allowed for employees. However, the Tax Cuts and Jobs Act 2017 banned these workers from taking the deduction from 2018 to 2025.
In order to be able to claim the home office deduction in 2021, taxpayers must exclusively and regularly use part of their home or a separate development on their property as their main place of business. This includes a place where you greet customers or clients, conduct your business, store inventory, rent it out or use it as a daycare center.
You don’t have to be a homeowner to claim the deduction — apartments are just as eligible according to the IRS as mobile homes, boats, or other similar properties.
It is also possible to take only part of the deduction. For example, if you quit a 9-to-5 job, started your own business in 2021, and use your home as your primary office space, you may be able to claim the deduction for part of the year, according to Wilson.
This is how the tax break works
There are two ways in which eligible taxpayers can calculate the home employment deduction.
In the simplified version, you can take $5 per square foot of your home office up to 300 square feet, giving the method a $1,500 ceiling.
This home office must be used solely for your business – so it cannot be a guest room with a desk in it – and you must be able to show that you need an office for your work. The burden of proof for this deduction lies with the taxpayer. So if you’re being audited, you’ll need to substantiate your claim with the IRS.
If you qualify for it and the government will give you the money for it, you should take it.
Vice President at Howard L. Markowitz PA, CPA
The regular version of the deduction is a bit more complicated as you have to keep track of all your actual expenses. You can write off some home office expenses up to 100%, e.g. B. the cost of repairs to the premises.
You can also deduct some other expenses, including utilities, based on the size of your office compared to your home. For example, if your home office accounts for 10% of your total living space, you can deduct that amount from the cost of your mortgage, rent, utilities, and some types of insurance.
IRS Form 8829 will help you determine eligible expenses for the business use of your home.
Because of this calculation, people with larger homes may not get as much using this method, said Adam Markowitz, an enrolled agent and vice president at Howard L. Markowitz PA, CPA in Leesburg, Fla. You can switch methods from year to year and should try to calculate both to see which results in a larger deduction.
If you are not eligible
While employees now working remotely may feel like they’re missing out, the home office deduction generally doesn’t result in excessive savings for those who take advantage of it.
The $1,500 maximum for the simplified deduction is generally about 35 cents on the dollar for most taxpayers, Markowitz said. That ends in a write-down of about $525, he said.
Additionally, the deduction could make it more difficult to sell your home in the future if you own it. That’s because you can write off the value of your home office, which could create a tax event later on when you sell it.
However, that doesn’t mean the home office deduction isn’t worth it if you’re eligible.
“If you qualify for it and the government gives you the money to do it, you should take it,” Markowitz said.
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