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Claiming the Home Office Deduction

 

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With all of the resources and technologies that are now available, telecommuting has never been easier.  Millions of professionals work from home on a full-time or part-time basis and countless others take care of administrative duties, such as scheduling or returning telephone calls and e-mails, from their home.  If you work from home, have you been claiming the home office deduction on your tax return?

Are You Eligible?

To be eligible to claim the home office deduction, a portion of your home must be used regularly and exclusively in connection with your business.  According to the IRS, "to qualify under the exclusive use test, you must use a specific area on your home only for your trade or business.  And to qualify under the regular use test, you must use a specific area of your home for business on a continuing basis".  If your home office is used for any non-business purpose during the year, or only sporadically in connection with your business, no deduction is allowed. 

Big Benefit for Renters

If you currently rent an apartment or house, you stand to benefit the most by claiming the home office deduction since rent is not otherwise deductible on your federal income tax return.  Let's say you use 300 square feet out of your 900 square foot apartment as your home office.  If that's the case, you can claim one-third of your rent and utilities as a home office deduction.

Homeowners Beware

If you're a homeowner, deciding whether to claim the home office deduction isn't so easy.  Remember, your two biggest household expenses, mortgage interest and real estate taxes, are already deductible.  So what's the benefit?  You might save some taxes by deducting a portion of your utilities, insurance, maintenance, and home repair, and by claiming depreciation on the business portion of your home.  Plus, if you're self-employed, taking the home office deduction should cut down on your "self-employment taxes".

The problem arises when you sell your home.  Even though most people aren't taxed when their principal residence is sold, any depreciation previously claimed becomes taxable upon the sale.   And if the home office isn't within your home, you won't be able to exclude paying taxes on that portion of the gain representing your office.  Generally, married couples who sell their principal residence generally don't pay taxes on the first $500,000 of gain realized.

How to Claim the Home Office Deduction

To claim the home office deduction, you need to complete and attach a Form 8829, Expenses for Business Use of Your Home, to your federal income tax return.  On the form, you'll prorate your allowable household costs by the percentage of your home that is used in connection with your business.  You'll then deduct those costs directly against net self-employment income (on the Schedule C) or as a miscellaneous itemized deduction (on the Schedule A).

IRS Publication 587, Business Use of Your Home

By claiming the home office deduction, you might significantly cut your tax bill.  To find out more, visit the IRS' website at www.irs.gov and read through IRS Publication 587, Business Use of Your Home.

 

 

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This article was written by Andrew D. Schwartz, CPA for YourWriters.com and had previously been posted on Collegexit.com.