Woman working at home talking 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 in the midst of the “great resignation”, start their own business and become their own boss in 2021.
But who can claim the deduction in the home office?
The general rule is this: Those who are self-employed and working outside their homes may be entitled to the tax relief. People who work remotely but receive a W-2 tax form from their employer do not qualify.
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“Knowing that you are not a 9-to-5 [worker] longer, you can now take advantage of the home office deduction “if you are eligible,” said Sheneya Wilson, CPA and founder of Fola Financial in New York, adding that it is one of the largest deductions that people working outside their home.can take.
Who can claim the deduction
There are some parameters when it comes to who is eligible for the home office deduction, even though millions of Americans worked from home in 2021 due to the ongoing coronavirus pandemic.
The tax relief is generally only for those who are self-employed, concert workers or independent contractors, not those who are employed by a company that gives them a W-2 come tax season.
“Employees who only receive a payslip or a W-2 from an employer are not eligible for the deduction even though they are currently working from home,” the IRS said in a September 2020 reminder of the home office deduction.
There may be some confusion as the home office deduction was previously allowed for employees. However, the Tax Cuts and Jobs Act of 2017 prohibited such workers from taking the deduction from 2018 to 2025.
To claim the 2021 home office deduction, taxpayers must exclusively and regularly use part of their home or a separate structure on their property as their primary place of business. This includes a place where you greet customers or clients, run your business, store furniture, rent out or use as a day care center.
You do not have to be a homeowner to claim the deduction – apartments are eligible, as are mobile homes, boats or other similar properties, according to the IRS.
It is also possible to take only part of the deduction. For example, if you left 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 relief works
There are two ways eligible taxpayers can calculate the home office 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 ceiling of $ 1,500.
This home office should only be used for your business – as in, it can not be a guest room with a desk in it – and you should be able to prove that you need an office for your work. The burden of proof for taking this deduction lies with the taxpayer, so if you are audited, you will need to back up your claim to the IRS.
The regular version of the deduction is a little more complicated as you have to keep track of all your actual expenses. You can write off up to 100% of some expenses for your home office, such as expenses for repairing the room.
You can also deduct a portion of other expenses, including utilities, based on the size of your office versus your home. For example, if your home office accounts for 10% of your entire living space, you can deduct so much from the cost of mortgages, rent, utilities, and some types of insurance.
IRS Form 8829 helps you find out the eligible business expenses for your home.
Because of this calculation, people with larger homes may not get as much from using this method, said Adam Markowitz, an enrolled agent and vice president at Howard L Markowitz PA, CPA in Leesburg, Florida. You can change method year to year and should try to calculate both to see what will give a larger deduction.
If you are not eligible
While employees who now work remotely may feel like they are missing out on something, the home office deduction generally does not lead to huge savings for those who take it.
The maximum value of $ 1,500 for the simplified deduction generally equates to about 35 cents on the dollar for most taxpayers, Markowitz said. It ends up being around a $ 525 depreciation, he said.
In addition, the deduction may make it harder to sell your home in the future if you own. This is because you can write off the value of your home office, which can create a tax event later when you sell.
Still, that does not mean that the home office deduction is not worth taking if you are entitled to it.
“If you’re entitled to it and the government wants to give you the money for it, you should take it,” Markowitz said.
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