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Tax Time: A Key Change in Home Office Deductions

A key change in the tax code will impact the use of home office deductions. The difference comes down to whether you are self-employed, or simply use your home for work as an employee.

For those people that had been taking this deduction (as an employee) on Schedule A of your tax return, you may have just lost a key perk. That’s because tax reform has eliminated miscellaneous itemized deductions formerly reported on Schedule A of an individual’s Form 1040.

For those that are self-employed, count on the same kinds of deductions you’ve gotten in the past. These expenses can still be used to reduce your net income on Schedule C of your tax return.

If you use part of your home for business, you can deduct part of your utilities, insurance, and repair costs. You can also deduct depreciation on the portion of your home you use for business.

Here is how that works:

If you use a room (usually an office) in your home only for business on a regular basis, you can deduct the expenses related to the room. You can deduct all the expenses that relate directly to the business area of your home. Examples include the cost of repairs to the room and the cost of painting the room. You can also deduct the portion of indirect expenses related to the business-use portion of your home. Indirect expenses include mortgage interest, real estate taxes, insurance, security, utilities, and repairs and maintenance.

Many people calculate the business-use portion by dividing the square footage of the business area by the total square footage of the home.

Because the calculation of the home office deduction can be complex, you can also elect a simplified approach. Multiply $5 by the number of square feet in the home office. The maximum number of square feet you can use in the calculation is 300, so the maximum deduction under the simplified method is $1,500.

When using the simplified calculation, it’s no longer important to have records of the home office expenses to substantiate the deduction, and Form 8829 is not required.

Generally, it is wise to figure the deduction using both the regular method and the simplified method. Then, choose which one provides the most benefit remembering that the amount of itemized deductions for mortgage interest and real estate taxes are also impacted by the method of choice. You can change your selected method each year.