A Home-Office Tax Deduction Refresher

Photograph by Reza Estakhrian

To claim the home-office deduction, or not to claim? That’s a decision millions who work at home are wrestling with now.

On the one hand, the deduction can be quite valuable: When Karen E. Klein wrote about the subject for Bloomberg Businessweek last year, the executive director of H&R Block’s research and analysis division estimated that the average home-office deduction was worth more than $2,600.

On the other hand, filing for the deduction is notoriously complex. Several years ago, I spent hours agonizing over the 43-line Form 8829 (PDF), then broke out a tape measure and a calculator to determine what percentage of my rental apartment’s square footage my home office occupied. For homeowners, the process is more complex, at least for those filers deducting portions of their mortgage payments and home depreciation. It’s no wonder that when the U.S. Department of the Treasury announced a plan to streamline the process beginning in tax year 2013—more on this below—the agency said that simplifying the process would save 1.6 million hours annually in tax prep time.

As a postscript to my home-office adventure, my returns for the following tax year were audited, and I’ve always believed that the IRS targeted me for my use of the deduction in a previous filing. It’s not really as simple as that: Claiming the home-office deduction may increase your chances of being audited, says Sandy Botkin, a former IRS lawyer and author of Lower Your Taxes—Big Time, but the deduction is only one factor in a complex formula.

With April 15 closing in, it’s worth revisiting Klein’s article. The key points: If you want to claim the deduction, you should make sure your home office really is an office—not a desk in the corner of the family den. Also, that you’re using the home office as your primary place of business, as defined by the IRS. If you meet the requirements, you can deduct a portion of your home’s expenses, including insurance, utilities, and rent.

An employee in a large company can claim the home-office deduction, too, if they meet the government’s requirements—which include the stipulation that the filer works from a home office for the convenience of her employer. It’s complicated, and you’ll want to read the IRS instructions (PDF) carefully or talk to someone who knows them well.

As far as the simplification push, starting with their 2013 returns, taxpayers will be able to skip some of the more complex calculations currently required for the deduction and simply write off $5 per square foot of home office, up to $1,500 or 300 square feet. Don’t rejoice too quickly: As Botkin wrote in a blog post after the new option was announced, the simplified process will save time, but for many taxpayers, the $1,500 cap will be less than what they would have claimed by completing the lengthier form.

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