As more and more people opt for the flexibility of working from home, understanding what expenses can be claimed on your tax return has never been more important. Claiming work-related expenses can help reduce your tax bill and maximize your savings.
Whether you work remotely on a full-time basis or occasionally work from home, understanding what expenses you can claim is essential. In this long-form blog, we’ll take a comprehensive look at what home office expenses you can claim, how to calculate and claim them, and how to ensure you comply with the IRS regulations.
Expenses You Can Claim When Working From Home
Home Office Expenses
If you use a portion of your home as your primary place of business, you may be eligible to claim home office expenses. These expenses include utilities, rent, property taxes, insurance, and mortgage interest. However, it’s important to note that the expenses of maintaining and repairing the entire house are not eligible for tax deduction.
To claim these expenses, you need to measure the square footage of your home office space compared to the total square footage of your home. You can then claim a percentage of your eligible home office expenses relative to the size of your home office space. For instance, if your home office occupies 10% of your total living space, you can claim 10% of the expenses that are eligible for tax deduction.
Internet and Telephone Expenses
If you use the internet and telephone for work-related purposes, you can claim a portion of these expenses. You can either claim a percentage of your monthly bill or a fixed amount per month. If you opt for the percentage method, you’ll need to keep records of your work usage compared to your personal use. If you choose the fixed amount, you can claim up to $50 per month for both internet and phone expenses.
Office Supplies and Equipment
Office supplies, such as stationery, printing cartridges, and other consumables, are fully tax-deductible when used exclusively for business purposes. The same is true for office equipment such as computers, printers, and scanners. However, if you use these items for personal reasons as well, you’ll need to apportion the expenses based on the percentage of time they are used for business purposes.
Depreciation of Equipment
When you purchase office equipment, such as a computer or printer, you can either claim the cost of the item in the year of purchase or claim a portion of the cost over several years through depreciation. The depreciation period is typically five years, and you can claim a portion of the original cost of the item each year. The percentage you can claim depends on the depreciation method you choose.
Miscellaneous Expenses
There are many miscellaneous expenses you can claim when working from home. These include the cost of professional development courses, business-related subscriptions and memberships, and business-related travel. To claim these expenses, you need to ensure they are directly related to your work and that you keep accurate records of the expenses incurred.
How to Calculate and Claim Your Home Office Expenses
Now that we have looked at the different types of expenses that are eligible for tax deduction, let’s take a look at how to calculate and claim them.
Calculating Your Home Office Expenses
Before you can claim any home office expenses, you need to calculate how much your home office space takes up relative to your entire home. To do this, you need to measure the area of your work area as a percentage of your total living space.
For instance, if your work area is 100 square feet, and your home is 1,000 square feet, your work area takes up 10% of your home. You can then claim 10% of your eligible home office expenses as a tax deduction.
Claiming Your Home Office Expenses
There are two methods of claiming your home office expenses: the simplified method and the regular method.
The Simplified Method
The simplified method is the easiest way to calculate your home office expenses, and it’s available to everyone who works from home. All you need to do is determine the size of your work area in square feet and multiply it by the IRS-set rate of $5.
For instance, if your work area is 100 square feet, you can claim $500 in home office expenses per year. You don’t need to keep track of individual expenses, and there is no limit on the amount you can claim.
However, it’s essential to note that you cannot claim any other home office expenses if you opt for the simplified method. For most people, this means the simplified method will not provide the maximum tax savings.
The Regular Method
The regular method involves calculating individual expenses that are eligible for tax deduction, such as rent, utilities, and office equipment. To claim these expenses, you need to keep accurate records of all costs incurred throughout the year. You’ll also need to keep track of the percentage of each expense that is eligible for tax deduction.
For instance, if your home office occupies 10% of your total living space, you can claim 10% of your rent as an expense. You’ll need to keep receipts and evidence of payment, and it’s essential to have a dedicated filing system to ensure accurate record-keeping.
To claim your home office expenses using the regular method, you’ll need to use Form 8829, Expenses for Business Use of Your Home.
Compliance Considerations
When claiming home office expenses, it’s vital to comply with all IRS regulations. Failure to do so could result in penalties or an audit. Here are some essential compliance considerations you need to keep in mind:
Home Office Space: Your home office space must be used regularly and exclusively for business purposes. It cannot be used for any personal activities, and it must be your primary place of business.
Documentation: You must keep accurate records of all expenses incurred throughout the year. It’s essential to keep any receipts, invoices, and evidence of payment to support your claim.
Proper Apportionment: When claiming expenses, you need to ensure you apportion each expense based on your home office’s size relative to your entire home.
Final Thoughts
Understanding what expenses you can claim when working from home is an essential aspect of maximizing your tax savings. By keeping accurate records and complying with IRS regulations, you can claim a wide range of expenses and reduce your tax bill. Whether you choose the simplified method or the regular method, you can ensure that working from home is a financially viable option.