Working from home comes with many benefits, including the home office tax deduction. Money Girl explains what this new tax break is, how to find out if you're eligible, how to figure your deduction, and how much money you could save.
At the end of 2017, the Tax Cuts and Jobs Act was signed into law. It made lots of high-profile changes, such as reducing the corporate tax rate and increasing the standard deduction for individuals.
In this episode, I’ll cover one of the lesser-known modifications to the tax law that every American who works from home should know. Beginning with the 2018 tax year, fewer taxpayers can claim the home office deduction. I’ll review the basics of this tax deduction and explain who’s still eligible to claim it.
How Tax Reform Changed the Home Office Tax Deduction
Before tax reform, the home office deduction was available to anyone who maintained a dedicated space in their home that was used solely and exclusively for business purposes. The majority of people claiming the deduction were self-employed individuals who ran their own businesses.
However, the deduction was also available to those who worked for an employer, in certain situations. Employees needed to meet additional requirements that self-employed people didn't, including that the work you did at home had to be for the convenience of your employer rather than just being a perk or helpful for you to do your job.
The bad news is that tax reform eliminated the home office deduction for employees because it took away the ability to claim miscellaneous itemized deductions.
The bad news is that tax reform eliminated the home office deduction for employees because it took away the ability to claim miscellaneous itemized deductions. Workers used to include home office deductions in this category on Schedule A, which allowed you to deduct an amount of that exceeded 2% of your adjusted gross income.
For example, if you earned $100,000 and had $5,000 in unreimbursed job expenses, you could deduct $3,000 (the amount over 2% of income). If you paid an average tax rate of 20%, that deduction would have saved you $600 in taxes.
While it’s true that the standard deduction under tax reform has nearly doubled to $12,000 for singles and $24,000 for joint filers, if you’re an employee who pays a significant amount of job-related expenses out of pocket, you may not come out ahead. Consider asking your company for ways to offset the costs you pay to be successful in your job—especially if you maintain a home office for their convenience.
So, the takeaway for employees is that if you work from home, you are no longer allowed to claim a home office deduction starting with the 2018 tax year. If you’ve grown accustomed to writing off a variety of expenses related to your job, they are no longer allowed.
Who’s Eligible for the Home Office Tax Deduction
The good news is that if you’re self-employed, you are eligible for the home office tax deduction. If you’re a freelancer, do contract work, or run a small business, you can still claim the deduction using Schedule C, Profit or Loss From Business, just like before tax reform.
The home office deduction is available for any self-employed person whether your venture is full-time, part-time, or if you rent or own your home. You can claim it no matter if you live and work in a single-family home, condo, apartment, co-op, mobile home, or even a live-aboard boat. You don’t need to have a business license or tax ID number to claim valid deductions.
Here are the two basic requirements you and your office must meet to be eligible for the deduction: