Who Can Claim Work from Home Tax Deductions 2023?
Since the start of the pandemic, thousands of people over the world have begun to adapt their homes to suit their working needs, and this trend isn't over, as most of them have decided they don't want to return to their regular offices.
This happened because working from home has many benefits, such as providing more flexibility in your schedule or saving some money that would go to your daily commute expenses. Moreover, when working from home, you get a fantastic perk, which is being eligible for a work from home tax deduction.
However, this isn't always the case, as you need to meet specific criteria to qualify for this tax deduction, and these rules tend to be quite strict. Therefore, we created this guide that's meant to show you how to make the best out of your taxes returns and see if you qualify for WFH deductions. Let’s learn how to claim home office tax deductions with us!
What Is WFH Tax Deduction?
Work from home tax deductions include all business expenses you make over a year and help you get better tax returns. However, only people who own a business and receive self-employment income can get this benefit. Usually, employees can't get a WFH tax deduction, even if their workplace permanently closed its offices.
The most popular tax deduction for home offices is called "home office deduction." It reduces your tax bills based on how much money you spend creating and maintaining your home office setup. Nonetheless, several other deductions can give you all types of benefits in the long run.
Who Is Eligible for Home Office Tax Deduction?
In order to be eligible, you need to be self-employed, and your home office must meet specific rules. However, the first requirement is quite flexible, as it includes anyone who at some point in the year was self-employed, no matter if they also were an employee on the side. Some of the people who are eligible for home office deduction during Covid are the following.
- Freelancers. It doesn't matter if they have a W2 job; their freelancing income is going to be treated separately as sole proprietors. Therefore, they can opt for WFH deductions.
- Gig Workers. Suppose you're an independent contractor, such as a taxi driver or a delivery worker. In that case, you can also qualify for this working from home tax credit deduction as long as you do your administrative work in your home office. That may help you deduct gas and insurance expenses.
- Real Estate Landlords. This situation applies the same logic as the previous one, but this time, you can deduct expenses such as advertisement, cleaning and repairing fees, etc.
What Is Exclusive Use?
Another requisite for being eligible for this work from home tax deduction is dedicating an exclusive area of your house to your business. Therefore, make sure you set aside a specific room for your home office and don't use it for anything else, not even for doing your kid's homework.
However, some IRS auditors are more flexible with this rule and say that any personal activity shouldn't surpass the common boundaries you see in an office building. Moreover, the exclusive section can be part of another room if you clarify the division.
What Is Regular Use?
You must also use this room regularly, and although there's no specific definition for this, it is pretty evident that if you use this room for a few hours every day, you may meet this criterion.
What Does "Principal Place of Business" Mean?
Another rule to qualify for home office expense deductions is that your home office must be your primary business location or a place where you regularly meet clients. However, this is quite a flexible rule, as if your home office is in a detached structure, you only need to meet the previous two criteria to qualify for a deduction.
What If Your Business Has Just One Home Office, but You Do Most of Your Work Elsewhere?
There's a difference between your principal place of business and your principal workplace. You could still benefit from this tax deduction for home offices if you do all your management and administrative chores in your home office but the rest of the work elsewhere.
Moreover, you can still qualify even if you work for a company and you spend most of the time at the office, as long as you have a side business based in your home. This rule is fantastic for new business owners who still need to work for other people while their business takes off.
What Qualifies as a Business?
Sometimes it can be hard to understand what a business is, but the answer is going to depend on the circumstances you're in. Keep in mind that you are more likely to be considered a business owner if you put actual time and effort into your business. Still, the primary requisite is the ability to generate income.
However, making money alone isn't a business. Therefore, if you manage an investment portfolio at your home office decor, although you're creating income, this isn't considered a business. Moreover, an exception is if you manage rental properties, as you may qualify to be a property manager instead of an investor.
How Do You Calculate Your Home Office Deduction?
Now that you know if you qualify for this home office expense deduction or not, it is time for you to learn about the two ways of calculating it. Remember that the simplified option is easier, but it gives you fewer benefits. However, the standard option is more complicated but results in a larger home office deduction during Covid.
The best thing to do is to use both and determine which one is the best for you each year.
The Standard Option
This method allows you to deduct up to 100% of all expenses you make for your home office, such as the paint or furniture you need for modifying the area. Moreover, you can also deduct a portion of your home expenses based on the percentage of your home that you use for your home office. This includes rent, water bills, electricity, and even mortgage.
In addition, this also reduces your property taxes, but calculating this isn't easy. Therefore, you may need the help of a professional public accountant to do this properly.
The Simplified Option
The simplified option was introduced in 2013, and it allows you to cut your expenses in a much quicker way. All you have to do is deduct $5 per square foot until you reach 300 square feet. This may allow you to eliminate up to $1,500 from your taxes without needing to keep a record of all the expenses you make throughout the year.
How Do You Take the Deduction?
This is also going to depend on the method you use. Just take the simplified process directly on Schedule C if you're using the simplified procedure. However, if you're using the standard mode, you need to use Form 8829 with Schedule C.
Please make sure that your expenses don't surpass your yearly income, but you can use those extra expenses on next year's tax returns if this happens.
What If You Are Self-employed for Just a Few Months?
We already mentioned this, so you probably know that you can still qualify for tax deductions for home offices if you were self-employed for only a few months. However, some rules apply to this. Some of those rules include only deducting your taxes from the months you were self-employed.
This also works when using the simplified method, as all you have to do is prorate the $5 based on the months you were self-employed. Moreover, this is only true if your property is less than 300 feet. If it is larger than that, you can take $120 per month.
What Are Other Home Office Expenses Tax-deductible?
You need to know that you can deduct a wide range of expenses from your taxes, such as home office furniture and equipment that you need for your home office setup.
Moreover, this can include a computer, a home office standing desk, an office chair, and even lighting. All of these expenses can be put on Schedule C for you to receive better tax returns.
Can I Use the Same Space for My W-2 Job and Side Gig and Still Claim the Deduction?
The short answer is no. If you also use your home office for your W-2 job, you aren't going to be able to claim the working from home tax credit deduction because you would be violating the exclusivity norm. Therefore, you need to make sure to use a different space for your W-2 job if you wish to claim this deduction. However, the area used for your W-2 job isn't going to be included in the work from home tax deductions.
Tax Tips for Home Office Deduction
Moreover, we know that doing taxes can be pretty time-consuming and confusing, so we gathered five easy tips that anyone could follow while making their work from home tax deductions. Keep reading to know more about it.
1. Only Deduct Home Office Expenses If You Worked Only for Yourself or in Addition to a W-2 Job
Please don't try to trick your tax regulators if you're an employee who works from home. These cases are more common than you think, especially now that more businesses have been creating remote cultures.
However, if you had any type of self-employment during the tax year and met all the other criteria, feel free to deduct your home office expenses, even if it was only a part-time hustle while being a W-2 employee.
2. Keep Thorough Records and Save Receipts
This is extremely important whenever you're going to do your taxes. Therefore, we recommend you always keep all your receipts and record all the expenses you make throughout the year. This may eliminate any doubts that may arise about your taxes.
Moreover, you should also keep all your bank statements to prove the payments were made. This should include all important data, such as the date, amount, and the receiver's name.
3. Consider the Simplified Work from Home Tax Deduction to Ease Your Record Keeping
Out of the two previously mentioned methods to deduct your taxes, we highly encourage you to use the simplified method, as this is going to make the whole process a lot easier, and you can do it by yourself without the need of hiring an accountant.
4. Consider Using the Standard Method If It Provides a Bigger Deduction
However, if you know for a fact that you spent more money in your home office workspace than what's reflected in the simplified method, you should opt for the standard method. This allows you to deduct an unlimited amount of money, and you can even eliminate some home expenses, such as your utilities and mortgage.
Moreover, these calculations tend to be quite complex and are going to take much more time to do than the simplified method. You could even need to hire an accountant.
5. Switch Between the Simplified and Direct Methods to Take the Biggest Work from Home Tax Deduction
If you're looking to get the biggest possible work from home tax deductions, the best thing you can do is to use both methods and compare the results. Then, simply use the one that yields the highest amount. You can switch the methods each year if you want, as no one is going to ask any questions about it.
Now that we have gone through all the ins and outs of claiming your work from home tax deductions, we want to remind you of the importance of filing your taxes in time. Moreover, you should pay special attention to all the minor details you may usually overlook, as this could help you save some money in the long run.
Nonetheless, suppose you're planning to create a home office that meets all the previously mentioned requirements. In that case, we recommend you look at our catalog, as you're going to find excellent home office essentials and office desk accessories for your setup.
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