Tax season is a scary part of the year for some—especially for those who work at home or who freelance. However, by making some small changes to your home or to the way you run your business, there are a couple of things you can do to ease the burden on your wallet and on your mind around tax season. Just keep in mind that work-from-home tax deductions are capped at $1,500 and are only offered to those working in the US.
Exclusive, Regular, and Principal Home Office Space
If you’ve got a space in your home that is used exclusively as an office—a separate room or space that is obviously sectioned off from the rest of your home—you may qualify for a deduction based on the square footage of that space.
If you use a program like Turbo Tax, the software will ask you a series of questions to determine whether or not you qualify. Some believe that taking this deduction can be a red flag for IRS audits, but since the 1990s, taking this deduction has become much simpler and far safer.
However, if you work from home, the deduction only applies to you if the space is used exclusively for your business or work. That’s not to say you can’t take personal phone calls or talk to family members in that room, but it cannot be used to do homework, study, play games, etc. There’s no specific definition of ”regular use” when it comes to filing taxes, but if you use the space for a few hours of pure business, you probably qualify.*
Expenses Related to Home Businesses and Offices
There are two types of expenses that may be tax deductible. The first, direct expenses, include repair, maintenance, upkeep, etc. Indirect expenses include bills and utilities, rent, mortgages, etc.
Let’s say you spend $100 on the room that makes up your office space. You’ll buy paint, perhaps a new desk, and of course there’s the Internet and phone bill, especially if you purchase a line dedicated to that office. Most of these direct costs can be covered by a tax deduction since the space is used as your home office.
Depending on the percentage of home space your office sucks up, you can also deduct portions of bills and utilities as indirect expenses. For example, if your home office takes up 15% of your entire home, you can deduct 15% from bills and utilities, homeowners insurance, HA fees, and security. You may also deduct from your Internet bill. If you rent your home, you can even deduct part of your rent if you meet the requirements.
These tax deductions can really pay off in the long-term if you run your business from your home or do most of your work from a home office. Though certain conditions apply to the deductions, eligibility is determined from year to year and programs such as TurboTax can help you calculate eligibility and the deduction you could receive.
*I am not a tax professional and do not provide professional advice. If you have questions or concerns about your taxes and tax deductions, contact a professional in your area. Image courtesy of Amybiederwolf.com