Tax reform made a lot of changes to the tax laws, and while high-profile moves, like reduced rates for corporate and individual income taxes, got a lot of attention, some of the smaller changes largely went unnoticed. One move that stayed under the radar was the elimination of the deduction for those employees who maintain a home office.
The move was somewhat unusual because it didn't take away the home office deduction for everyone. However, unless you make what for many would be a dramatic change to your work status, there won't be anywhere for you to claim your home office expenses when you file your 2018 tax returns. We'll explain more fully what you'll need to do to keep the home office deduction later in the article, but first, let's take a look at the deduction itself and how employees formerly qualified.
The basics of the home office deduction
Under previous law, the home office deduction generally was available to those who maintained a dedicated space in their homes that they used solely and exclusively for business purposes. The majority of people claiming the deduction were self-employed individuals who ran their own businesses.
Yet the deduction was also available to those who worked for an outside employer in certain cases. Employees needed to meet additional tests that self-employed people didn't, including that the business use must have been for the convenience of your employer rather than just being helpful or appropriate for you to do your job.
Many employees take work home with them, but it's not enough just to have a dedicated space for doing that work. It also has to qualify as your principal place of business, effectively meaning that you'd need to do more work from home than you would at your employer's office. You can also qualify if you meet clients in your home or the office is a separate structure on your property, like a studio or workshop.
If you qualify, then you're allowed to take a deduction for the expenses associated with the use of that portion of your home. That typically allows you to deduct a proportional fraction of expenses incurred throughout the home, such as rent and utilities. You can also deduct in full the expenses that are solely associated with your work activities, such as a business phone line. You can either calculate actual expenses or use a simplified method that assigns a specific dollar value per square foot of office space each year.
What tax reform did to the home office deduction
Tax reform eliminated the employee home office deduction by taking away the ability to claim miscellaneous itemized deductions. Those who qualified under the old law wrote off their home office deductions on Schedule A. They were only deductible to the extent that they, along with any other miscellaneous deductions, exceeded 2% of your adjusted gross income -- but that still was enough to be valuable for employees in many cases.
Now that miscellaneous itemized deductions aren't allowed anymore, employees don't have anywhere to claim home office expenses. The higher standard deduction might make up for that loss for some taxpayers, but others still will see a tax hit from the loss of the break.
The key thing to remember, though, is that tax reform didn't take away home office expense deductions for everyone. If you're self-employed, nothing has changed, and you still can claim the deduction on your Schedule C as you used to.
For employees, there might be some temptation to look at whether being self-employed is a better option. From a tax perspective, there are some upsides and downsides to self-employment: The easier method of deducting all sorts of business-related expenses will be counterbalanced by the loss of benefits and paying self-employment taxes. Unless you have an extensive home-office setup, relatively few employees will find it worth their while to try to negotiate an independent contractor relationship solely to preserve this tax break.
Be smart with your deductions
Tax laws change all the time, and tax reform's changes were quite extensive. By being prepared for the consequences of tax reform long before you're preparing your tax return early next year, you'll be able to avoid any nasty surprises from the loss of this or other tax breaks that you've counted on using in past years.