The pandemic has shifted the way Americans work -- perhaps forever. Remote work has become part of our new normal and in September of last year alone, 45% of full-time employees reported working from home in some capacity, according to a Gallup survey. And if you're one of the millions of remote workers who works from their kitchen table daily, you may be wondering about the home office tax deduction. But, if you work for a traditional employer, you won't qualify for this tax break.
"If someone tries to claim a home office deduction and doesn't have an at-home business activity, be it self employment or farm activity or other business, taking the benefit without other matching tax information can create a red flag in the IRS's system," according to Mark Steber, chief tax information officer at Jackson Hewitt Tax Service.
Who does qualify? In short, business owners, freelancers or gig workers who use a home office or home office space 100% of the time for work reasons. But there are some caveats. Here's everything you need to know about the home office deduction for your 2021 taxes.
Note: It's always a good idea to consult a trusted tax advisor or tax software service to get the specifics for your particular situation.
What is the home office deduction?
At the most basic level, this deduction lets you reduce the amount of taxes you owe by claiming the space in your home that's dedicated to working as a business expense.
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Who can claim the home office deduction?
Though millions are now working from home due to the coronavirus, only a subset of them can claim the deduction. At a basic level, if you are self-employed -- that is, if you work for yourself, set your own hours or own a small business -- you probably qualify to claim this deduction. According to the IRS, these three worker categories are technically eligible:
- Independent contractor
- "Gig economy" worker
Are full-time W-2 employees working from home eligible?
They are not. In 2017, the Tax Cuts and Jobs Act suspended tax write-offs for home office deductions through 2025. That means if you are an employee who gets a W-2 from an employer, you are not eligible for the home office deduction -- even if you're working from home.
Note that this could change at some point, but hasn't yet.
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What types of office spaces are eligible?
Once you determine that you're eligible for the deduction, you must evaluate whether your home office fulfills the requirements. First, it needs to be the primary space where you work; if you rent office space somewhere else, your home office isn't tax-deductible. Second, the space needs to be dedicated to working; if you eat at your kitchen table and you also work at it, technically it doesn't qualify.
"The IRS describes an office-in-home as an area separated from the living part of the home, used only for business to either meet clients, maintain books and conduct other business-related needs, and used exclusively for this purpose," according to Steber.
You can claim the deduction whether you rent or own your home, and regardless of whether you live in a house, apartment or condo. You cannot claim it, however, if you've been holed up for the past year in a hotel room or other temporary housing. There are a few loopholes for in-home service providers and business owners who store inventory at home.
Will the IRS take a harder look at the use of this deduction this year?
It's hard to say, according to Garrett Watson, senior policy analyst at the Tax Foundation, though he says that a W-2 employee claiming the deduction with no other income has a greater chance of attracting the attention of the IRS. "For self-employed filers, it will be more challenging for the IRS to catch improper use, though the agency does use several tactics including checking to see if this is a new deduction to narrow in on potential issues."
Will the government expand eligibility now that more people are working from home due to COVID-19?
Not likely. If the government wants to enhance its relief efforts for people grappling with the economic fallout of the pandemic, there are plenty of other levers to pull. "If the pandemic continues on and large volumes of taxpayers continue to work remotely, it is likely that other tax changes might be proposed, including a possible tax break related to that activity," says Steber.
Are there downsides to the home office deduction?
The major drawback isn't specific to the deduction itself -- but rather the dreaded self-employment tax. If you work for yourself or own your own small business, you'll be taxed at a rate of 15.3% on the first $142,800 of your combined wages, tips and net earnings. And the threshold is low: If you earned $400 or more from self-employment during 2020, you're on the hook for paying this tax.
If you want to plunge into the weeds of claiming the home office deduction (and other business expenses), check out IRS Form 8829. But any good tax software package will walk you through the process of claiming the office home office deduction -- and a host of other tax deductions -- including those related to health insurance premiums and retirement savings. And there are more details about the specifics, including exactly how to calculate your home office deduction, on the IRS website.
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