A woman working from home talks to a virtual assistant
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Millions of Americans have started working remotely or from home during the coronavirus pandemic.
Others decided to take the plunge amid the “Great Resignation”, start their own business and become their own boss in 2021.
But who can claim the tax deduction for registered office?
The general rule is that people who are self-employed and work from home may be eligible for tax relief. Individuals who work remotely but receive a W-2 tax form from their employer are not eligible.
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“Knowing you’re not a 9 to 5 [worker] Plus, you can now take advantage of the home office deduction “if you’re eligible,” said Sheneya Wilson, CPA and founder of Fola Financial in New York, adding that it’s one of the most popular deductions. important that people who work from home can take.
Who can claim the deduction
There are certain parameters for who is eligible for the home office deduction, even though millions of Americans worked from home in 2021 due to the ongoing coronavirus pandemic.
The tax relief is generally reserved for the self-employed, self-employed, or independent contractors, not those who are employed by a company that gives them a W-2 come tax season.
“Employees who receive a paycheck or W-2 exclusively from an employer are not eligible for the deduction, even if they currently work from home,” the IRS said in a September 2020 reminder on the home office deduction.
There may be some confusion, as the home office deduction was previously allowed for employees. The Tax Cuts and Jobs Act 2017, however, barred these workers from benefiting from the deduction from 2018 to 2025.
To benefit from the home office deduction in 2021, taxpayers must exclusively and regularly use part of their home or a separate structure on their property as their principal place of business. This includes a place where you greet clients or customers, conduct business, store inventory, rent out, or use as a daycare center.
You don’t need to be a homeowner to claim the deduction — apartments are eligible, as are mobile homes, boats, or other similar properties, according to the IRS.
It is also possible to take only part of the deduction. For example, if you quit a 9-to-5 job, started your own business in 2021, and used your home as your primary office space, you may be able to claim the deduction for part of the year, according to Wilson.
How the tax reduction works
Eligible taxpayers can calculate the home office deduction in two ways.
In the simplified version, you can take $5 per square foot of your home office up to 300 square feet, giving the method a cap of $1,500.
This home office must be used solely for your business – as in, it cannot be a spare bedroom with a desk – and you must be able to prove that you need an office for your job. The burden of proof for taking this deduction is on the taxpayer, so if you are audited, you will need to back up your claim with the IRS.
The regular version of the deduction is a little more complicated because you have to keep track of all your actual expenses. You can deduct up to 100% of certain home office expenses, such as the cost of space repairs.
You can also deduct a portion of other expenses, including utilities, depending on the size of your office relative to your home. For example, if your home office accounts for 10% of your entire living space, you can deduct that amount for the costs of mortgage, rent, utilities, and certain types of insurance.
IRS Form 8829 will help you determine eligible expenses for business use of your home.
Because of this calculation, people with larger homes may not get as much using this method, said Adam Markowitz, registered agent and vice president at Howard L Markowitz PA, CPA in Leesburg, Florida. You can change methods from year to year and try to calculate both to see which will give a larger deduction.
If you are not eligible
While employees now working remotely may feel like they’re missing out, the home office deduction generally doesn’t lead to outsized savings for those who take it.
The $1,500 maximum for the simplified deduction generally works out to about 35 cents on the dollar for most taxpayers, Markowitz said. That ends up being a write-off of about $525, he said.
Also, taking the deduction could make it harder to sell your home in the future, if you own it. This is because you may depreciate the value of your home office, which could create a tax event later in the sale.
Still, that doesn’t mean the home office deduction isn’t worth taking if you qualify for it.
“If you qualify for it and the government gives you the money, you should take it,” Markowitz said.
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