Now, more than ever before, tax deductions are a hot topic because more people are working from home. If you’re a remote worker, you might have heard other people boast about how much money they saved on taxes because they were able to work from home.
Now we can stop with the anecdotal evidence! First, we’ll check your eligibility for home-based deductions and, if so, what those are.
Who Can Claim Work-from-Home Deductions?
Tax deductions for work from home (WFH) allow you to lower your tax liability by reducing taxable income with business-related expenses.
Costs like this may cover things like furniture, electronics, and stationery for your home office. You can also cover the costs of heating, cooling, lighting, and internet-related utilities in your office space.
Who is qualified?
You can’t claim your home office as a tax deduction if you’re not eligible. The self-employed and company owners are the ones who typically qualify for these discounts.
Typically, “W2” employees, who receive a regular paycheck from their employers, do not qualify. W-2 employees who have voluntarily left the office culture to work from home cannot deduct these costs unless there are exceptional reasons.
A Space Deductible That Works for You!
Whether you have a separate home office for your W2 job and your side business determines your eligibility for working from home with both jobs. It could be tempting to use your W2 office as a side hustle, but that would mean you can’t claim your home office as a tax deduction.
In most cases, it’s wise to tailor your home office layout to meet your business’s minimal requirements in order to maximize your tax deduction. You can still claim a partial home office deduction even if you’re just self-employed for a few months, as long as you maintain it professionally.
Make an effort to maintain a neat and organized work environment if your home gym or living room is located in a certain corner. To simplify computations during tax season (such as determining your square footage and utilities), it is helpful to keep track of the precise dimensions and purpose of your home office.
How are WFH deductions actually performed?
In contrast to tax credits, WFH deductions do not function in the same way. To summarize, you will not be able to pocket $5,000 in tax savings just because you had $5,000 in company expenses. Instead, a subtraction of the equivalent claim amount will result in a smaller taxable amount.
Remember that your deduction will primarily depend on your business’s annual income. Consider the hypothetical scenario of a freelance graphic designer who expects to deduct $10,000 in expenses but only makes $7,000 in the year. In this case, the actual deduction you receive might be far lower.
Making an arrangement
There are a number of tax breaks available to people who legally work from home, such as those who manage a business or do freelance work. However, document your spending to get your money’s worth.
In the event of an audit, the Internal Revenue Service strongly suggests that you maintain detailed records of all company expenses, which may appear extravagant. Every piece of paper and digital documentation related to your remote job should be kept in a book for easy access.
Jot down notes about the date, cost, and individual or company engaged in the transaction in the extremely unlikely event that you do not have or cannot find the receipt.
The Regular Method vs. the Simple Approach
The normal technique and the simplified method are two ways to claim your WFH deductions. Using this straightforward procedure, eligible employees can pay up to $1,500 (or $5/SF) for office space up to 300 SF.
In contrast, the conventional approach necessitates more specific data, including the proportion of your house used for commercial purposes, a deduction for that proportion, and meticulous spending records.
What is the superior approach?
Given its simplicity, many qualified employees are likely opt for the simplified method. The worst season of the year is tax time! A numbers person who is hell-bent on lowering their tax liability may find that the conventional approach is worth the additional effort because of the larger deductions it offers.
You must work consistently to file your taxes using the standard method, unlike the basic method, which you can do while calculating your income. Although keeping track of your spending and getting a better measurement of your home office could be a lot to take in, the conventional approach has no restriction on deductions, which is a major plus! It also lets you roll over any business expenses you didn’t use last year.
After doing the math, choose
If you find tax season unbearable, it would be prudent to opt for the straightforward approach. Adding up the costs of both methods can help you decide which is best if you can save a lot of money using the conventional method.
Regardless of your decision, be sure you’re committed to seeing it through. Once you select one method for a specific tax season, you cannot switch back to the other in the same year. Picking the simple approach for one year and the standard method for another will still add an extra step because you’ll need to calculate the depreciation deduction for the following year.
This is a reminder for workers enrolled in the W2 Program
Even if they aren’t eligible, W2 workers can still take advantage of some savings opportunities through WFH deductions. If your company offers a reimbursement program, you may be required to keep track of business expenditures by submitting an expense report. Reimbursing a payment quickly is better than deducting the same amount several months later.
Tell the truth
You must be truthful with the charges you claim, whether you receive reimbursement for certain office items or deduct your entire workspace. If you say playing on your Nintendo Switch helps you relax and work better, don’t disregard it.
When in doubt, confirm that the item you’re about to claim is essential for your position. If you only use an item for business, it should be easy to write it off. Avoid reporting unusual expenses to prevent confusion.
