No matter how much you earn, you surely want to keep your tax burden as low as possible, and one good way to do that is to capitalize on the different deductions you're entitled to. Now as a reminder, when you claim a deduction on your tax return, what you're effectively doing is exempting a portion of your income from taxes. And while many key deductions did go away as part of the massive 2018 tax overhaul, one valuable one that still exists is the home office deduction.
Are you eligible for a home office deduction?
To claim a home office deduction, you must meet two criteria. First, you must have a dedicated space in your home that's used solely for business purposes. This means that if you're a graphic designer who sets up shop at the kitchen counter, that doesn't qualify, since your kitchen is used for purposes other than work. In addition, your home office must constitute your primary place of business. If you rent office space and use it for 30 hours a week, and only work from home 10 hours a week, you're not eligible.
Here's another important requirement with regard to the home office deduction: You must be self-employed to claim it. It used to be that if you were a salaried employee who worked from home, you could claim your home office as part of the miscellaneous deduction provision that once existed under the tax code. That deduction, however, was eliminated in the 2018 tax overhaul, which means that if you're considered somebody else's employee, you're not allowed to take it.
How to claim your home office deduction
There are two methods you can employ for claiming a home office deduction. The first is the simplified method, which gives you $5 per square foot of office space you maintain, up to a maximum of 300 square feet, or $1,500. The second, and potentially more lucrative method, is the standard method, which lets you deduct expenses related to having a home office.
There are two different types of expense you can claim: direct expenses and indirect expenses. Direct expenses include items necessary to maintain your home office and do your job, like printer ink and paper. Indirect expenses are those needed for your home in general, like heat, electricity, and water.
Calculating your direct expenses is easy, because you just copy the amounts your receipts show and call it a day. For your indirect expenses, you'll need to total those numbers and claim a proportionate amount based on how much space your office takes up within your home. For example, if you rack up $20,000 in indirect home expenses during the year (keeping in mind that things like property taxes also count), and your office takes up 200 square feet within your 2,000-square-foot home, you can claim 10% of $20,000, or $2,000. In this example, you're better off using the standard method to claim your home office deduction than the simplified method.
Don't get burned by the home office deduction
Because the home office deduction is often abused by taxpayers, claiming it might increase your chances of an audit. Your best bet, therefore, is to be as truthful as possible when claiming your deduction, and only write off expenses you have proof of via receipts or paid bills.
Furthermore, be careful when claiming direct expenses for your home office. If you earn $80,000 a year and buy a $8,000 office furniture set, that's technically a valid deduction, but the IRS might take note of the fact that you're spending 10% of your income on it.
That said, don't be afraid to claim expenses that are valid. If you buy new computer equipment for $3,000 that's used for work, there's no reason not to write it off. Just don't be shocked if the IRS asks to see a copy of that receipt.