Most people these days take the standard deduction on their taxes. This tends to be the most financially sensible option since the size of the standard deduction doubled for the 2018 tax year. However, for those who still itemize their taxes, two of the most common deductions are the vehicle and home office deductions.
Here’s a quick overview from our bookkeeping service in Round Rock, TX of what you should know about each of these deductions.
The home office deduction will be an especially common deduction for the 2020 tax year, given the number of people who have been forced to work from home during the COVID-19 pandemic. There are a couple methods of taking this deduction: using the simplified option, in which you calculate a deduction based on the square footage of your designated office space, or a more complicated method in which you measure actual expenses against the residence expenses, allowing you to deduct mortgage interest, taxes, repairs, maintenance, utilities and more.
How do you decide which of these methods you’ll use? This depends on where you can expect to see the bigger deduction.
If you’re using the actual expense method, you are able to deduct direct expenses specifically for the home office in full. Indirect expenses like insurance, utilities, taxes or general home repairs are deductible based on the percentage of the home you use for your business.
The simplified version allows you to deduct $5 per square foot of the home used for your home office, if the home office is 300 square feet or less. The simplified method may make more sense in some cases, especially if your direct or indirect expenses are relatively low.
Just make sure you hold on to all your receipts so you can prove direct or indirect expenses you deduct if you’re subjected to an audit.
Most of the vehicle deductions you can get are only available if you use the vehicle for business purposes. You cannot deduct the full cost of a vehicle unless it’s used exclusively for business, but there are still some other deduction opportunities for you to consider.
If you do intend to make vehicle-related deductions, you will need to keep a careful log of the number of miles you drive for business, as well as logs of expenses for parking, tolls, gas, car washes, maintenance, repairs and more.
Unfortunately, you will not be able to deduct the costs of your commute—you can only deduct the mileage and expenses that are specifically on-the-job, business-related expenses.
There are some other, less-common types of deductions you might qualify for. These include vehicle donations, driving your vehicle for medical purposes (such as transporting yourself or a dependent to or from a medical facility) and expenses related to moving or relocating.
To learn more about some of the most common deductions you may be able to claim on your taxes this coming year, we encourage you to contact Perrin Anderson Rastogi Tax Services LLC today at our accounting firm in Round Rock, TX.