Two methods for taking home office tax deductions for 2014
Before you file your 2014 income tax return, make sure you know about the Internal Revenue Service’s options for claiming home office tax deductions. If you’re one of the 3.3 million American taxpayers who utilize these deductions, be aware that you have choices.
Beginning with the 2013 income tax year, the IRS has been offering home workers the simplified option—also known as the “safe harbor method”—for taking advantage of the tax deductions available for conducting business out of your home. The safe harbor method makes it easier to calculate your deductions, but also limits certain benefits that the standard method offers.
Percentage versus square footage
In the standard home office tax deduction method, you calculate the percentage of your home’s size that is used for your business. Then you apply that percentage to allowable deductions, such as utilities, mortgage interest, casualty losses, and property taxes, as long as you have all the records to back up those expenses. With the safe harbor method, you can claim up to 300 square feet and take a flat deduction of $5 per square foot. Either way, you’ll still need to file Schedule A (itemized deductions).
The regular method for home office tax deductions allows you to claim depreciation on the portion of your home that is used for your business. You can also recapture the depreciation when you sell your home. The simplified option doesn’t allow for any depreciation deductions.
If loss carryover applies to your tax situation, you need to think carefully here. For a loss carried over from the previous year, you can take the deduction in your 2014 income tax return with the standard method. The simplified option does not allow for loss carryover.
Home office qualifications
In order to claim home office tax deductions on your 2014 income tax return, your space must meet all of the following criteria:
- Your “home office” must be a dedicated space used exclusively for business. Using your kitchen counter doesn’t allow you to deduct your entire kitchen space. If you use a room that has multiple functions, you’ll need to move your office or forego the deductions.
- Your home office must be your primary place of business.
- If you work from home as a paid employee, you cannot be charging rent to your employer and also take the home office tax deductions.
The standard method is a good choice for taxpayers who are great at maintaining records. The reward for doing so could be a bigger tax payoff. If you’re trying to determine which method will be better for you, multiply your home office’s square footage by $5. Compare that result with your total home office deduction for the prior year. If the square footage dollar amount is higher, the standard method is a good choice, as long as you have the documentation to support your deductions, and the patience to do the 43 lines of calculations on the IRS Form 8829. You can get more information about the simplified method on the IRS website.