It’s nothing new for IRS forms to be described as complex and a “recordkeeping burden.” But it’s a little unusual when the organization picking on the IRS is the IRS itself.
That’s what the agency did, however, in announcing a new streamlined home office deduction starting with the 2013 tax year.
If you work from home and are eligible to deduct your home office expenses, it may be a lot simpler this year.
But be careful: the new method is optional, and the old, complicated method may save you more money.
Don’t sleep in your home office
The first rule of the home office deduction is don’t talk about the—wait, that’s something else.
The first rule of the home office deduction is the exclusive use rule.
If you like to curl up in bed with your laptop and write reports, that doesn’t make your bedroom a home office.
Call a room whatever you want, but the IRS doesn’t consider it a home office unless it’s exclusively used for business.
The IRS is good at catching abuse of the deduction, says Brandon Ferguson, CPA and owner of Ferguson Tax Services in Seattle.
“A lot of times there’s a bed in there, which makes it a guest room, or there’s personal storage items, or kid’s toys, dog toys, whatever,” says Ferguson.
“And the IRS has a high success rate of blocking those,” he adds.
The rules about what qualifies as a home office haven’t changed under the new streamlined deduction. Only the method of calculating the deduction has.
The old and the new
Under the old system, you calculate the home office deduction like this:
- Divide the area of your home office by the total square footage of your house or apartment
- Multiply that ratio by your total general household expenses: rent or mortgage, insurance, utilities, and so on
So you have to chase down a year’s worth of utility bills. And this is a vast oversimplification, since we’re talking about a 43-line form (form 8829).
The new method looks like this:
- Measure the square footage of your home office
- Multiply by $5, and deduct a maximum of $1500
All you need is five minutes and a tape measure. But there’s a catch. “So far, what I’ve seen this year is, almost every single time, the old version gives you a bigger deduction,” says Ferguson.
That’s because the old version doesn’t have a cap on the deduction.
If you pay high rent, own an expensive house, or have a large home office, the old deduction is probably going to serve you better.
My friend Neil deMause is a freelance writer in Brooklyn. He no longer maintains an exclusive home office, but he used to take the deduction.
“The last time I deducted, it was, let me see, $1955 for 100 square feet,” he says.
I don’t maintain a home office, either, partly because I can’t work at home (too many snacking opportunities) and partly because the IRS would find Legos in every room of my apartment.
But I pretended to carve off a 150-square-foot home office and ran the deduction both ways. The old method was more than twice as lucrative as the new, streamlined method.
“That would be useful if I lived in Wichita,” quipped deMause.
Naturally, I looked up some data about Wichita, which has some of the most affordable homes in the US.
And deMause was right: say you live in the median home in Wichita, maintain a 200-square-foot home office and pay $500/month for your mortgage, which is not a misprint.
Depending on your utility bills, you can probably deduct an extra $200 or so under the new system, saving you a few bucks in taxes and a lot of paperwork.
Making the call
If you’ve taken the home office deduction previous, it’s going to be easy to decide whether to use the new one: compare last year’s deduction with the area of your home office times $5.
If this is your first time taking the deduction, make a rough estimate of the cost of your home office by dividing its area by your total square footage and multiplying by your annual rent or mortgage payment.
The answer should be clear. If it’s close, your tax preparer or tax software like TurboTax can help.
Finally, remember that if you run a home day care, the deduction is calculated differently.
For details, see IRS publication 587. I didn’t read it closely, so I’m just going to assume you can deduct anything a toddler drools on.