An unprecedented number of Americans are working from home now, thanks to the COVID-19 pandemic. It stands to reason that since you’re doing all the duties of your job from home—and you’re paying for the space, the utilities and the internet—you should be able to take the home office deduction, right? Before you start dreaming of hefty home office deductions in Round Rock, TX, read on—there are very specific requirements and limitations for what the IRS considers a home office.
Are you self-employed or an employee?
If you are self-employed or an independent contractor, you’re eligible to take the home office deduction—but thanks to the Tax Cuts and Jobs Act of 2017, individuals who are traditional W-2 employees can no longer deduct for a home office.
The goal of the Tax Cuts and Jobs Act of 2017 was to simplify tax preparation, but it also eliminated a lot of previous deductions. In return, the standard deduction increased to $12,000 for single filers and $24,000 for married filing jointly. About 90 percent of tax filers now claim the standard deduction.
Home offices and self-employment
Now that COVID-19 has affected millions of incomes across the nation, most people are looking for ways to keep their tax liability low. Self-employed individuals have been more interested in taking the home office deduction this year.
To take the home office deduction, you can deduct a portion of the mortgage or rent, property taxes, some utilities and other expenses associated with an office—but that is limited to spaces where you regularly and exclusively conduct business. If your “home office” is also your bedroom, it’s harder (if not impossible) to make the argument that this is a dedicated space for work.
Make sure you consult a tax professional if you’re considering this deduction—it can be complex, and you’re more likely to undergo an audit if you claim it.
What can I do if I’m a traditional employee?
It doesn’t seem fair that you’re paying for internet, increased utilities and other expenses out of pocket, rather than your employer, especially as a result of a pandemic. However, under the Stafford Act, your employer can provide tax-free assistance due to an emergency. Usually, this is something like a natural disaster, but the pandemic is considered a national emergency.
Employers might offer assistance for things like child care, funeral expenses, installing high-speed internet, computer equipment and other living, personal and business expenses. As long as the payments aren’t meant to cover things paid for by insurance, or replace lost income, it’s a relatively flexible option.
Keep in mind that your employer might not offer this assistance, so it’s not a guarantee like a proper home office deduction for a self-employed person would be. If it is available, however, it can offset significant costs.
If you’ve been working from home in Round Rock, TX and need help preparing your 2020 taxes, get in touch with the team at Perrin Anderson Rastogi Tax Services LLC today.