How to Cut Taxes When You Work From Home
Working from home comes with many benefits, including the home office tax deduction. Money Girl explains what this new tax break is, how to find out if you’re eligible, how to figure your deduction, and how much money you could save.Â
Laura Adams, MBA
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How to Cut Taxes When You Work From Home
At the end of 2017, the Tax Cuts and Jobs Act was signed into law. It made lots of high-profile changes, such as reducing the corporate tax rate and increasing the standard deduction for individuals.
In this episode, I’ll cover one of the lesser-known modifications to the tax law that every American who works from home should know. Beginning with the 2018 tax year, fewer taxpayers can claim the home office deduction. I’ll review the basics of this tax deduction and explain who’s still eligible to claim it.
How Tax Reform Changed the Home Office Tax Deduction
Before tax reform, the home office deduction was available to anyone who maintained a dedicated space in their home that was used solely and exclusively for business purposes. The majority of people claiming the deduction were self-employed individuals who ran their own businesses.
However, the deduction was also available to those who worked for an employer, in certain situations. Employees needed to meet additional requirements that self-employed people didn’t, including that the work you did at home had to be for the convenience of your employer rather than just being a perk or helpful for you to do your job.
The bad news is that tax reform eliminated the home office deduction for employees because it took away the ability to claim miscellaneous itemized deductions.
The bad news is that tax reform eliminated the home office deduction for employees because it took away the ability to claim miscellaneous itemized deductions. Workers used to include home office deductions in this category on Schedule A, which allowed you to deduct an amount of that exceeded 2% of your adjusted gross income.
For example, if you earned $100,000 and had $5,000 in unreimbursed job expenses, you could deduct $3,000 (the amount over 2% of income). If you paid an average tax rate of 20%, that deduction would have saved you $600 in taxes.
While it’s true that the standard deduction under tax reform has nearly doubled to $12,000 for singles and $24,000 for joint filers, if you’re an employee who pays a significant amount of job-related expenses out of pocket, you may not come out ahead. Consider asking your company for ways to offset the costs you pay to be successful in your job—especially if you maintain a home office for their convenience.
So, the takeaway for employees is that if you work from home, you are no longer allowed to claim a home office deduction starting with the 2018 tax year. If you’ve grown accustomed to writing off a variety of expenses related to your job, they are no longer allowed.
Who’s Eligible for the Home Office Tax Deduction
The good news is that if you’re self-employed, you are eligible for the home office tax deduction. If you’re a freelancer, do contract work, or run a small business, you can still claim the deduction using Schedule C, Profit or Loss From Businessopens PDF file , just like before tax reform.
The home office deduction is available for any self-employed person whether your venture is full-time, part-time, or if you rent or own your home. You can claim it no matter if you live and work in a single-family home, condo, apartment, co-op, mobile home, or even a live-aboard boat. You don’t need to have a business license or tax ID number to claim valid deductions.
Here are the two basic requirements you and your office must meet to be eligible for the deduction:
- Exclusive use – requires you to use a certain part of your home on a consistent basis for business. For instance, you might choose to work from a guest room, a detached garage, or any identifiable space.
If you live in a small place, like a studio apartment, you could have a desk that qualifies as your office. You don’t need walls to separate your office, but it should be a distinct area within your home. The only exception to this “exclusive use” rule is when you use part of your home for business storage purposes or as a daycare facility. In these two situations, you can deduct the entire spaces used, even if they are also used for personal purposes.
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- Principal place of business – requires you to show that your home is the main place where you conduct business. However, it doesn’t have to be the only place you work or meet customers. For instance, you might also work at a coffee shop, a co-working space, or meet clients in their homes from time to time.
As I mentioned, your business could be part-time. If you have a full-time job at another company and work on your business from home in the evenings, you’re still qualified for the deduction, if you meet the two requirements.
How to Calculate the Home Office Tax Deduction
If you qualify for the home office deduction but have never taken it, you’re probably wondering how much you can claim. The deduction you receive depends on the type of calculation method you choose and the types of expenses you have.
The IRS allows you to choose between two methods and you can pick the one that gives you the largest tax break for any year:
1. Standard home office deduction
This method requires you to determine the percentage of your home that’s used for business. You divide the square footage of the area used for business by the square footage of your entire home.
For example, if your home office is 12 feet by 10 feet, that’s 120 square feet. If your entire home is 1,200 square feet, then diving 120 by 1,200 gives you a home office space that’s 10% of your home. That means 10% of the qualifying expenses of your home can be attributed to business use and the remaining 90% are personal use.


So, if your monthly power bill is $200 and 10% of your home qualifies for business use, you can consider $20 of the bill a business expense. To claim the standard deduction, use Form 8829, Expenses for Business Use of Your Homeopens PDF file , to figure out the expenses you can deduct and then file it with Schedule Copens PDF file .
2. Simplified home office deduction
This method allows you to claim $5 per square foot of your office area, up to a maximum of 300 square feet. So, that caps your deduction at $1,500 (300 square feet x $5) per year.
If your office is larger, you’ll come out ahead using the standard method instead. The simplified method really is simple because you don’t have to do any record-keeping, just measure the space and include it on Schedule Copens PDF file .
If you own your home, you can also deduct home-related deductions (such as mortgage interest and real estate taxes) by itemizing them on Schedule A, Itemized Deductionsopens PDF file .
The simplified method works best for small home offices, while the standard method is better when your office takes up a large portion of your home. If you’re not sure which is best, try both to find which one saves you the most in taxes.
But no matter which tax calculation method you choose, you can’t deduct more expenses than the amount of your home-based business’ gross income.
But no matter which tax calculation method you choose, you can’t deduct more expenses than the amount of your home-based business’ gross income. If your income from the business is less than your expenses, your deduction for certain home office expenses will be limited. When your qualified deductions are greater than your income, you can carry over the excess to the next tax year.
Which Expenses are Deductible for a Home-Based Business?
If you run your own business from home, claiming the home office deduction is a smart way to make certain personal expenses partially deductible. Some of your everyday costs turn into business write-offs.
There are two types of expenses that you’ll need to track in order to claim the standard home office deduction: direct and indirect expenses.
- Direct expenses – are for your office only. Let’s say you start a side business, such as giving music lessons in your home or selling items on eBay. If you create an office in your spare bedroom and paint the room, install carpet, and install window treatments, these direct expenses are 100% deductible, no matter the size of the office. Â
- Indirect expenses – are for your entire home. You’d have these expenses even if you didn’t have a home office. For example, they might include mortgage interest payments, property taxes, rent, insurance, maintenance, cleaning, utilities, garbage disposal, and a security system. They’re partially deductible based on the size of your office as a percentage of your home.


But expenses that are completely unrelated to your home office—such as remodeling in other parts of your home or the addition of a pool—are never deductible. And you typically can’t deduct exterior expenses like yard work or gardening, even when you regularly see clients or vendors where you live.
The amount you can claim as a home office deduction depends on the type of calculation method you use and the types of expenses you have.
What Homeowners Should Know About Claiming the Home Office Tax Deduction
If you’re a homeowner, taking the home office deduction gets a little more complicated because only a portion of your mortgage payment is deductible. You can’t deduct the principal portion, which is the amount you borrowed for the home.
Instead, you’re allowed to recover a portion of the cost each year through depreciation deductions, using formulas created by the IRS. You can claim mortgage interest, property taxes, home insurance, and depreciation, as indirect expenses.Â
Remember that even if you don’t run a business from home, you can deduct mortgage interest and property taxes as part of the mortgage interest tax deduction if you itemize on Schedule Aopens PDF file . However, it’s likely that you’d come out ahead by claiming a portion of them for your business instead.
More Deductible Business Expenses
Business expenses that are unrelated to your home office are fully deductible no matter where you run your business or work when you’re self-employed. These might include business insurance, legal advice, a computer, and office supplies.
How you deduct a business expense and how much of it is tax-deductible depends on whether it benefits:
- Your entire home, such as power and water
- Your office only, such as carpeting or paint in that area
- Your business, such as a computer or software.
Claiming tax deductions on your home office and business can get complicated. Instead of running in the dark, reach out to a qualified tax accountant tax accountant who can help you make the most of your potential tax deductions each year, especially when you work from home. It’s well worth your time and money to seek advice and make sure your business will be successful.
You can learn more about the home office deduction rules in IRS Publication 587opens PDF file .
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About the Author
Laura Adams received an MBA from the University of Florida. She’s an award-winning personal finance author, speaker, and consumer advocate who is a frequent, trusted source for the national media. Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers is her newest title. Laura’s previous book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show.