How Your Home Affects Your Taxes: Home Office

Just a few years ago, the Tax Cuts and Jobs Act (TCJA) of 2017 greatly changed existing tax laws that affect homeowners. How your personal tax bill has been affected by the changes in the law depends on your income, where you live, how much you spent (or plan to spend) on a home, and whether you decide to itemize on Form 1040’s Schedule A or take one of the standard deduction amounts.

The Inflation Reduction Act of 2022 has a beneficial financial impact on select energy-saving improvements to your home for the 2023 tax year. The majority of the provisions of that act in regard to energy-saving elements are in effect for the 2023 tax year.

Once again, the standard deduction has increased slightly for 2023 and for individuals is $13,850, and for married couples filing jointly is $27,700. (Those numbers are different for individuals older than 65, legally blind or heads of households.) Because these standard deductions have increased, itemizing deductions may no longer make financial sense for some taxpayers.

Here are some basic home-related tax facts you should be aware of in light of the changed tax laws. For clarification, forms, and publications, visit the Internal Revenue Service at www.IRS.gov. Be sure to consult a tax professional for complete information applicable to your specific situation.

TAX FACTS: To take a home office deduction, you must be self-employed and the home office must be used exclusively and regularly for your business and be your principal place of business, with few exceptions. If you receive a W-2 from your employer, you do not qualify for a home office deduction. Second, the home office deduction can only be taken if you itemize your deductions. If your home office qualifies, there are two ways to claim the home office deduction.

METHOD #1: You can prorate the usage of your home. For example, if your home office space is 250 square feet and your home is 2,500 square feet, you could claim as a deduction 10% of home-office expenses such as utilities, insurance, repairs, cleaning, taxes, mortgage interest, etc. Be aware, however, any depreciation claimed after May 6, 1997, will be taxed at 25% if the residence is sold for a gain, whether or not the property has been converted to personal use.

METHOD #2: A simplified home office deduction calculation was introduced in tax year 2013 to bypass maintaining detailed expense records. Simply deduct $5 for every square foot of home office space used, up to a maximum of 300 square feet or $1,500. This simplified expense is recorded on Schedule C rather than Form 8829, which allows you to separately deduct mortgage interest and real estate taxes on Schedule A.

HELPFUL HINT: If you (or your family) use your home office for non-business purposes, it cannot be claimed on your tax return. To claim home-office deductions, the space must be used exclusively and regularly for business purposes.

This is just a summary of complex laws. Be sure to work with a qualified tax professional.