Claiming the Home Office Deduction
Many people have found themselves working from home during the COVID-19 pandemic. If you’re one of them, you might wonder, “Can I claim the home office deduction on my 2020 tax return?”
The short answer is: Only if you’re self-employed. Employees can no longer claim home office expenses, and even self-employed taxpayers must follow strict rules to claim a deduction.
If you qualify, you can deduct the “direct expenses” of the home office. This includes the costs of painting or repairing the home office and depreciation deductions for furniture and fixtures used there. You can also deduct the “indirect” expenses of maintaining the office. This includes the allocable share of utility costs, depreciation and insurance for your home, as well as the allocable share of mortgage interest, real estate taxes and casualty losses.
Alternatively, you can use the simplified method for claiming the deduction — $5 per square foot for up to 300 square feet. Although you won’t be able to depreciate the portion of your home that’s used as an office, you can claim mortgage interest, property taxes and casualty losses as an itemized deduction to the extent otherwise allowable, without needing to apportion them between personal and business use of the home.
You can deduct your expenses if you meet any of these three tests:
1. Principal place of business. You’re entitled to home office deductions if you use your home office, exclusively and regularly, as your principal place of business. Your home office is your principal place of business if it satisfies one of two tests. You satisfy the “management or administrative activities test” if you use your home office for administrative or management activities of your business, and you meet certain other requirements. You meet the “relative importance test” if your home office is the most important place where you conduct business, compared with all the other locations where you conduct that business.
2. Meeting place. You’re entitled to home office deductions if you use your home office, exclusively and regularly, to meet or deal with patients, clients or customers. The patients, clients or customers must physically come to the office.
3. Separate structure. You’re entitled to home office deductions for a home office, used exclusively and regularly for business, that’s located in a separate unattached structure on the same property as your home. For example, this could be in an unattached garage, artist’s studio or workshop.
You may also be able to deduct the expenses of certain storage space for storing inventory or product samples. If you’re in the business of selling products at retail or wholesale, and if your home is your sole fixed business location, you can deduct home expenses allocable to space that you use to store inventory or product samples.
The amount of home office deductions for self-employed taxpayers is subject to various limitations. Proper planning is key to claiming the maximum deduction for your home office expenses. Contact us if you’d like to discuss your situation.
How the CAA Affects Education Funding
The Consolidated Appropriations Act (CAA), signed into law late last year, contains a multitude of provisions that may affect individuals. For example, if you’re planning to fund a college education or in the midst of paying for one, the CAA covers two important areas:
1. Student loans. The CARES Act temporarily halted collections on defaulted loans, suspended loan payments and reduced the interest rate to zero through September 30, 2020. Subsequent executive branch actions extended this relief through January 31, 2021. The CAA leaves in place that expiration date.
Also under the CARES Act, employers can provide up to $5,250 annually toward employee student loan payments on a tax-free basis before January 1, 2021. The payment can be made to the employee or the lender. The CAA extends the exclusion through 2025. The longer term may make employers more willing to offer this benefit.
2. Tax credits. Qualified taxpayers generally can claim an education tax break with the American Opportunity credit and the Lifetime Learning credit. Previously, though, the two credits were subject to different income phaseout rules, with the American Opportunity credit available at a greater modified adjusted gross income (MAGI) than the Lifetime Learning credit. In addition, before the new law, there was a higher education expense deduction for qualified tuition and related expenses that taxpayers could opt to claim instead of the credits.
The CAA applies the higher American Opportunity credit phaseouts to the Lifetime Learning credit, effective for tax years beginning after December 31, 2020. The credits will phase out beginning at MAGIs of $80,000 for single filers and ending at $90,000. For joint filers, they will begin to phase out at MAGIs of $160,000 and disappear at $180,000. The new law also eliminates the higher education expense deduction for 2021 and beyond.