If you qualify, the work from home tax deductions can save you lots of money.
Whether you live in the United States of America or Canada you need to have a dedicated home office in order to claim a tax deduction.
One of the main criteria to claim a home office tax deduction is if you use that home office as an exclusive space to use for work or business and meet some other specific eligibility criteria.
We'll break down some details first for the USA, then for Canada.
Who can claim home office tax deductions in the USA?
- Exclusive space /home office to work or run home business
- Your home is the principal space to conduct your business or work.
- All other IRS regulations are all to be considered as well such as citizenship, residency, etc.
There are certainly going to be some gray areas or room for interpretation to the above list and it is imperative that you consult with a tax professional if you have any doubts whether you qualify.
In the instance of using a space exclusively for your work or business.
You may have your laptop set up on your coffee table 90% of the time to do your work but in the eyes of the IRS, it is still your coffee table in the living room.
Other questions may arise if you do conduct some of your work or business outside of the home. This is where a tax professional can guide you on how much outside of the home business would be allowed to maintain work from home tax benefit levels.
How home office tax deductions are calculated.
There a couple of ways to calculate your eligible home office deductions.
One way is quite easy and another can get complicated.
The easy way is to multiply $5 per square foot of office space.
An example would be a 15 x 15-foot room or 225 square foot office.
225 x $5= $1125 home office deduction.
The other way would be to calculate each item related to the portion of the home office space.
That is to say, your home office expenses are proportional to the size and expenses of your home.
As an example, let's say your home is 2250 square feet and your office is still 225 square feet, that means that your home office represents 10% of the total home expenses.
You can claim home expenses such as mortgage interest, home insurance, property taxes, alarm systems to name a few along with specific home office upgrades and repairs.
If you pay $2000 for home insurance then you could claim 10% of that which would be $200. Same for mortgage interest which could be something in the thousands per year. If you pay $5000 then you can claim $500 of that.
Although it can get more complicated and you need to keep really good records the total you can claim the itemized way is usually higher than the basic $5 per square foot for the simple way.
How to claim your home office tax benefit.
Schedule C, line 30 for self-employed home office business use.
Schedule A of form 1040 for employees. Deductions will need to be itemized and claimed as an unreimbursed employee business expense.
Cautionary note...IRS tends to scrutinize home office deductions more closely and therefore at higher risk for audits.
That doesn't mean you should not claim the tax deduction if you are eligible.
As long you are sure that you meet the work from home office eligibility for tax benefits then, by all means, claim your deduction.
The IRS themselves state that 20% of qualifying Americans tend to miss out on a tax break worth up $6318 every year.
Who can claim home office tax deductions in Canada
- Your home workspace is where you mainly do your work more than 50% of the time.
- You use your home workspace only for earning employment or business income.
- You also need to use it on a regular and continuous basis to meet customers, clients or other people in the course of your employment or business.
As with the regulations for the USA, there are a number of gray areas to consider when submitting home office tax deductions. If you are in any way not sure you qualify to be sure to consult a tax professional.
Similar rules apply when considering what is your main area of doing your work from home business or employment. A dining room or coffee table will still be a dining room or coffee table even if you are sitting there over 50% of the time.
How home office tax deductions are calculated.
There are differences in what you can claim working from home depending if you are self-employed or employed.
If you are running a home based business you can deduct home expenses such as property taxes, mortgage interest, home insurance and heat to name a few.
Those that have a work from home business and want to claim expenses then see Income Tax Folio S4-F2-C2 Business Use of Home Expenses for more information.
Whereas if you are working at home as an employee you CANNOT deduct mortgage interest, property taxes, home insurance or capital cost allowance. You can only claim the portion that relates to your workspaces such as electricity, heating, and maintenance.
If you are employed and working from home then you will also need the employer to complete Form T2200, Declaration of Conditions of Employment.
Unfortunately I am not able to claim my work from home employment as we signed an agreement that our work from home arrangement is volunteer and not an expectation of the employer. So my employer would not be filling out Form T2200 at this time.
Our home business on the other hand is something that we can certainly claim and fortunately the home business tax deductions allow for more expenses to be claimed.
In general, the portion of the home office that you can claim as a tax deduction is similar to that described for the USA.
You will need to calculate each item related to the portion of the home office space.
Your home office expenses are proportional to the size and expenses of your home.
As an example, if your home is 2250 square feet and your office is 225 square feet, that means that your home office represents 10% of the total home expenses.
You can claim 10% of the home expenses accordingly. Keeping in mind there are different expenses you are able to claim if you are self-employed or an employee.
With a home business if you pay $2000 for home insurance then you could claim 10% of that which would be $200. Same for mortgage interest which could be something in the thousands per year. If you pay $5000 then you can claim $500 of that.
Although it can get complicated and you need to keep really good records the total you can claim can be quite substantial.
How to claim your home office benefit.
Home Business: Income Tax Folio S4-F2-C2 Business Use of Home Expenses
The CRA tend to review home office deduction claims closer due to the increased incidents of fraudulent reports whether on purpose or not.
If you qualify then it will be financially beneficial for you to claim these deductions despite the higher risk.
Seek professional tax assistance if you have any doubts about being eligible to claim the work from home deductions.
We all hate tax time but think of the benefits you can get if you take the time to ensure that you claim all the deductions for which you qualify.
If the IRS are saying that a large portion of people are missing out on their full benefits then make sure you go get it.
That is the main purpose of this post.
We are certainly not tax experts by any means.
Remember that tax deductions can get complicated and new laws or rules are added every year.
Take advantage of using professional tax assistance or if your claims are fairly basic the available online services have worked well for us.
Here are a couple of handy links.
Have any questions or comments? Please leave them below we love to hear from you.