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Home
Office Deductions Add To Your Home's Tax Savings
 Along with the mortgage
interest deduction, mortgage credits, deducting points and capital gains tax breaks on the
sale of a home, your residence provides a bounty of tax relief for living there, but it
also offers breaks if you work there too.
If you work at home and want to save money with the new, liberalized rules for 1999
home office deductions, become familiar with them now so you can assess your situation and
be sure you will be able to validate your claims.
More than 1.5 million Americans claim the deduction and cut an average of $2,000 from
their tax bill, according to Working Today a nonprofit advocacy group for self-employed
workers.
"There's been an explosion in the number of people working out of their homes, so
this is a fast-growing issue," says Joe Schwartz, president of the California Society
of Enrolled Agents.
Here are some basic facts to consider if you work at home:
 | A home office may qualify for deductions if you use it for administrative or management
activities of your trade or business if there is no other fixed location to conduct such
activities. |
| The home office deduction is available to you whether you rent or own. |
| If you rent, figuring your home office deduction is pretty simple. Just multiply your
annual rent payment by the percentage of the total space occupied by the office. That
prorated portion can also be applied to utilities, insurance, repairs and maintenance. |
| If you own your home, possible home office deductions include a portion of mortgage
payment, real estate taxes, depreciation, utilities, insurance, repairs and maintenance. |
| There are limitations to home office deductions based on your income. The taxpayer must
be able to itemize deductions, using Schedule A. The home office deductions -- along with
other miscellaneous deductions -- must exceed 2 percent of your adjusted gross income. For
the self-employed, home office deductions, other than mortgage interest and real estate
taxes may not exceed your self-employed net income reported on Schedule C. |
| Some types of home-based businesses helped by the new rules are employees who
telecommute to the main office, doctors who bill from home, tutors who grade from home,
plumbers and other tradespeople who perform their duties at job sites, as well as outside
salespeople who call on customers. |
| The business use of an employee's home must be for the convenience of the employer and
the employee must not be renting the office space to the employer. |
| Be aware that claiming home office deductions can reduce the $250,000 (single filers)
and $500,000 (joint filers) exclusion from tax of the gain from the sale of a qualified
principal residence. The portion of the home used for a home business isn't eligible until
two years after its converted back to residential use. |
"Each case is unique and should be evaluated before making a decision," says
Schwartz. "Now is the time to make that evaluation, and for those who decide to claim
home office deductions, be sure the necessary record-keeping is occurring." Hiring an
enrolled agent, certified public accountant or other tax professional isn't a bad idea
either.
Written by Robert
Lee
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