If you work from home, or conduct a substantial amount of business while you're home, you might be able to claim a home office deduction on your tax return. This deduction can be rather lucrative -- you can proportionally deduct many of your household bills, as well as any expenses directly related to the office itself. However, you should be aware that the deduction is often abused, and therefore is a pretty big red flag for the IRS when deciding who to audit. So, it's important to be sure that you qualify.

What is the home office deduction, and how much can you claim?
The home office tax deduction is intended to let people who use part of their home for business to deduct related expenses. There are two methods that can be used to compute the deduction, and you can choose whichever you'd like.

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The simplified option allows for a standard deduction of \$5 per square foot of the portion of the home used for business, with a maximum of 300 square feet. So, if you use a room that measures 15 feet by 12 feet as your office, or 180 square feet, you can deduct \$900.

Or, the regular method of computing the deduction could be more beneficial, but requires more calculation and documentation. This involves calculating the actual expenses related to the business use of your home, as a portion of the total home. Examples of expenses may include, but are not limited to:

• Mortgage interest and/or mortgage insurance
• Rent
• Homeowners insurance
• Utilities
• Pest control services
• Repairs
• Depreciation

For example, let's say that you have the following home expenses, and that you use 150 square feet of a 1,500 square foot home as your office.

Expense

Annual total

Rent (\$1,500/month)

\$18,000

Electricity

\$1,500

Water

\$400

Security system

\$250

Pest control

\$200

So, your total home expenses are \$20,350. In order to compute your home office deduction, use the following formula:

In our case, this would be

Notice that in this example, the regular method produces a significantly larger deduction than we would compute using the simplified method. This may or may not be the case for you, so be sure to figure out the deduction using both methods in order to get the largest possible benefit.

Is your home office really a home office?
In order to claim the home office deduction, there must be a room or other area in your house that is used for the sole purpose of conducting your business. The idea behind the home office deduction is that the space is not used as living space by you and your family, so if it is used for any other purpose than you doing work, it does not qualify.

For example, if you have a computer cart in the corner of your dining room, you may not claim the space as a home office. Similarly, if you have your workstation set up in a room that doubles as a guest bedroom, it's technically not a home office, even though it is used for that purpose most of the time.