How to Maximize the Home-Office Tax Deduction
There are two different ways to calculate the write-off. But to qualify, you must use your home office "exclusively and regularly" for your business.
Question: I'm mostly retired, but I earn some money as a self-employed consultant. I use an extra bedroom in my house as my office. Do I qualify for the home-office deduction?
Answer: You might. To qualify for the home-office deduction, you must use your home office "exclusively and regularly" for your business, and you can't perform other activities in that area of your home. Your home office must also be your principal place of business or a place where you meet regularly with clients.
If you qualify, there are two ways to take the deduction. You can use the "simplified method," which gives you a deduction of $5 per square foot for the portion of your home you use for business (up to 300 square feet, which is a maximum deduction of $1,500). Or you can deduct a percentage of your actual expenses, based on the portion of your home you use for your office, if that gives you a bigger tax break than the simplified method.
Here's an example of how to calculate the write-off if you choose to deduct a percentage of actual expenses: Say the bedroom you use for your office is one-tenth of the total square footage of your home. You can deduct 10% of your rent or mortgage interest, electricity, water bill, gas bill and other utilities, as well as that portion of your real estate taxes and homeowners or renters insurance premiums. You'll also be able to deduct the full cost of any eligible expenses specifically for your home office, such as the cost of painting or repairs to that room. Keep receipts for all of those expenses.
You can calculate the deduction on IRS Form 8829 Expenses for Business Use of Your Home, which you include when you file your income tax return for the year. See the Instructions for Form 8829 for more information. Self-employed people include that total on line 30 of their Schedule C, where the amount is deducted from their self-employment income.
For more information about the home-office deduction, see IRS Publication 587 Business Use of Your Home. Also see the IRS's Home Office Deduction fact sheet. For more information about taxes for self-employed people, see Tax Deductions for Independent Contractors.