As remote and hybrid work models remain in effect, many clients have asked which deductions, if any, can be claimed for working from home.
For W-2 employees, even if required to work from home, the short answer is none. The Tax Cuts and Jobs Act of 2017 suspended the miscellaneous itemized deductions subject to the two percent of adjusted gross income floor through 2025. The miscellaneous itemized deductions included certain professional fees, investment expenses, and unreimbursed employee business expenses, including the home office deduction.
Self-employed taxpayers, independent contractors, and those working in the gig economy may be able to claim a deduction for their home office as long as they use part of their primary home exclusively and regularly for conducting business and the home office has no other use.
Here are two methods to claim the deduction:
- Simplified Option. This option allows for a standard deduction of five dollars per square foot up to a maximum of 300 square feet (for a maximum deduction of $1,500). This method allows the full home-related itemized deductions on Schedule A, such as mortgage interest and real estate taxes (subject to limitation). No depreciation deduction allocated to the space used for the home office or later recapture of depreciation is allowed.
- Regular Method. In this option, the home’s actual expenses are allocated to the home office based on the square footage of the home office over the total square footage of the home. Actual expenses include mortgage interest, insurance, utilities, repairs, and depreciation. The taxpayer can deduct direct expenses if related solely to the home office, such as painting or repairs.
The definition of home includes a house, apartment, condo, mobile home, boat, or similar property. It also includes structures on the property like an unattached garage, studio, or barn.
The regular method requires the taxpayer to keep adequate records or corroborating evidence. The simplified option is intended to reduce the taxpayer’s burden and does not require recordkeeping but does limit the available deduction. The taxpayer has the option to switch methods from taxable year to taxable year, however, once the taxpayer has elected a method for a taxable year, they cannot later change to the other method for that same year.
There is a gross income limitation to the amount deductible under the simplified and regular method. The home office deduction cannot exceed the gross income of the taxpayer’s business. Under the simplified method, the amount in excess of the gross income limitation may not be carried forward and deducted in the subsequent taxable year. Any limitation in computing the regular method may be carried forward but not deducted if the simplified option is used. The home office deduction is reported on Form 8829.
A handful of states do not conform to Federal law and allow W-2 employees to claim the home office deduction. Contact us for additional information on calculating and reporting the home office deduction on your personal income tax return.
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