Working from home, either as a remote employee or for your own business, has become common—but tax reform significantly changes who can claim a deduction for it. Laura explains the new rules for taking a home office deduction and how to use it to save money.
Working from home, either as a remote employee or for your own business, has become common. Companies and those who are self-employed can drastically cut overhead when they don’t have to pay for office space. And most employees love skipping the daily grind of commuting and having flexibility for when and where they work.
Another huge benefit of working from home is claiming money-saving tax deductions. But beginning with the 2018 tax year, fewer taxpayers will be eligible for home office deductions under the new Tax Cuts and Jobs Act.
In this post, you’ll learn what tax reform did and didn’t change about claiming a deduction when you work from home.
Beginning with the 2018 tax year, fewer taxpayers will be eligible for a home office deduction under the new Tax Cuts and Jobs Act.
Home Office Tax Deduction Changes for Employees
Getting a tax deduction for a home office is treated differently depending on whether you work for yourself or for someone else. Let’s start with how tax reform affects deductions for W2 employees.
Beginning in 2018, employees are no longer eligible to deduct unreimbursed job expenses, including the cost of a home office. So, if you’ve grown accustomed to writing off a variety of expenses related to your job, it’s time to kiss them goodbye. (You can still claim valid expenses on Schedule A for your 2017 tax return, so don’t miss out on deductions that were legal before tax reform began.)
Prior to the Tax Cuts and Jobs Act, workers could deduct job expenses that weren’t reimbursed by their employers. You couldn’t deduct all of them, but you could claim a total that added up to more than 2% of your adjusted gross income.
Deductible expenses included any “ordinary and necessary” cost to do your job or improve your job skills, such as:
- Subscribing to a trade magazine
- Attending an industry conference
- Buying protective clothing
- Paying union dues
- Buying your own tools
- Driving your vehicle
- Paying for travel, lodging, and meals
- Working with an employment agency to find a new job
- Using any part of your home for your work
These are just a few examples from a long list of eligible expenses that, under the old tax rules, employees could deduct when they shelled out for them, but weren’t reimbursed. Any expense that helped you do your job, including the cost of maintaining a home office, was fair game for a deduction.
Unless employers choose to reimburse workers for these common costs, the elimination of this deduction is a big blow to employees with job-related expenses. 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.
How Businesses Can Use the Home Office Tax Deduction
The good news is that if you’re self-employed or run a business from home, tax reform didn’t change your ability to deduct home office expenses against your business income.
Now, let’s switch gears and cover claiming a home office deduction when you work for yourself.
The good news is that if you’re self-employed or run a business from home, tax reform didn’t change your ability to deduct home office expenses against your business income. You can still claim the costs of a home office as business expenses, using Schedule C.
So, the only taxpayers affected are employees who work from home, not business owners and those who are self-employed. However, the same strict limitations on who can claim a home office deduction still exist.
Who Can Claim the Home Office Deduction
I received a question on this topic from Sandy N., who says, “I have a part-time business selling on eBay. I work at home and store all my inventory there, but in different rooms. Do I qualify for the home office deduction? If so, how would I calculate it and do I need a tax ID number?”
Thanks for your question, Sandy. You don’t need a tax ID number to have a business or to claim valid tax deductions. If you use part of your home exclusively and regularly to conduct your business, even on a part-time basis, you’re qualified to deduct home office expenses.
You can include both the space you use for work plus your inventory storage spaces in your deduction calculation. You can even take a home office deduction if you work in other locations occasionally, such as meeting people in a coffee shop or visiting businesses. You can claim a home office no matter if you own your home or rent.
How to Calculate the Home Office Deduction
The deduction amount you can claim depends on the type of calculation method you use and the types of expenses you have.
The deduction amount you can claim depends on the type of calculation method you use and the types of expenses you have. There are two ways you can claim a home office deduction. If you’re not sure which home office method is best, try both to find which one saves you the most in taxes.
- Standard method: This method requires you to determine the percentage of your home that’s used for business. Measure the total square footage of your home and the total square footage of your work areas. Then divide the business area by the size of your entire home. For example, if your home or apartment is 2,000 square feet and 400 of it is your work and storage areas, you could deduct 20% of your expenses.
This method requires you to keep detailed records of all your expenses. You use Form 8829 to figure out the expenses you can deduct, complete Schedule C, and submit both forms when you file taxes.