Freelancers, telecommuters, and anyone who’s self-employed, this one’s for you! As tax time approaches, you’re probably gearing up for a mad dash of organized chaos – especially those of you who work for yourself. What with all the expenses you track throughout the year and forms and proof of income required by the IRS – you may be sitting on a pile of paper big enough to get your heart racing. That’s why you may be interested to hear about an option to simplify at least one area of your taxes.
If you’ve been self-employed or telecommuting for a while, you might already know about the Home Office Deduction that you can apply to your taxes each year. It’s based on expenses associated with keeping and maintaining a home office that’s used to conduct your work or business. As described on the IRS site, these expenses are calculated by including costs like:
- mortgage interest
Sound a bit complicated? The traditional Home Office Deduction certainly takes time and a fair bit of planning to compile all your info and punch the numbers. It’s particularly difficult if you haven’t exactly kept track of any or all of these expenses over the year. That’s why the IRS is unrolling a simplified version of the deduction that allows you to calculate your deduction based on the size of your office. For every square foot in your working space, you’re eligible for a $5 deduction. That results in a fairly straightforward equation:
Sq. ft. x $5 = deduction
While this makes it easier to calculate, there is a cap on the deduction at $1,500.00. That means anyone with a space larger than 300 sq. ft. will probably see less benefit using this simplified method compared to someone using a smaller office that doesn’t exceed the limit. A recent article by Forbes looked at who exactly benefits by sticking to the standard route, concluding that:
“The bigger your home office, the more likely the actual expense method will yield a bigger tax break.”
Tried and true may still be the best method
The Forbes article points out that even though it requires more work, the old system could be worth the effort. Because the expense tracking method takes more specific costs into account compared to the broader (albeit simpler) equation, tracking expenses may very well result in a higher deduction. And those who will likely benefit are those who work from a space that’s larger than 300 square feet, such as those who run a larger business from their home or who have an entire room or floor dedicated to their home office space.
It’s also important to note that any office space must be partitioned and used exclusively for your business actions. Doctoring a room where guests regularly stay into an office space doesn’t cut it under the IRS stipulations.
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Not a small business owner or freelancer?
More and more people are plugging in and working remotely so freelancers aren’t the only ones benefiting from this kind of tax break. If you work from home, you may be eligible. However, remember – not every home office qualifies. Your home office use “must be for the convenience of your employer.” If you use your office space for personal use or double your home office space as a guestroom, then you don’t meet the requirements for this tax deduction.
If you’ve recently switched to working from home and were previously unaware of the tax benefits, then the aforementioned simplified option could be the best option for you. As it requires little more than room dimensions and a calculator, you’ll be able to take advantage of rewards even if you failed to track your home office expenses.
Image Credit: Jeremy Devine Design