In Redwood City what will the IRS allow you to write off on your taxes for your home office? If you work from home, even on a part-time basis, you can probably save a few dollars come tax time. That’s because you can write off as a business expense part of the cost of owning and operating your home. Everything from electric bills to property taxes may be fair game. Redwood City real estate has tax benefits to homeowners working from home.
Those tax deductions can add, thus lowering your taxable income and reducing the amount you owe Uncle Sam. Before you start
spending that refund, however, there are a few rules you need to understand and heed. It’s a good idea to consult a tax adviser so that you’re filing the right schedules and maximizing your deductions.
Passing the IRS litmus test
To meet IRS guidelines, your home office is your principal place of business, or the place you see clients in the normal course of business. Parts of your home you use to store products or equipment for your business also count. You are not required to all of your work at home. If you’re an outside salesperson, you probably spend most of your work time elsewhere. But if you do you billing and return customer calls primarily from your home, your home office should qualify.
You can also qualify for the deduction if your employer requires you to work from home, as long as you don’t charge your employer rent. One big catch is that you must support the at-home office for your employer’s convenience, not your own, such as to complete reports at night or on weekends. Self-employed workers use IRS Form 8829 to calculate the deduction, which they list on Schedule C.
Measuring your home office
The amount you can deduct for your home office depends on the percentage of your home used for business. Your work space isn’t a separate room—a table in a corner qualifies. But it is in an area that’s used solely for business. The tax break also covers separate structures on your property, like a detached garage you’ve converted to an office. Unlike an office inside your home, a separate structure isn’t always your main place of business to qualify for a deduction. That’s because the IRS believes your family is less likely to use a separate structure as a part-time play area or den, says Mark Luscombe, principal analyst for tax and consulting at CCH.
To calculate what percentage of your house the home office occupies, divide your home office’s square footage by the total square footage of your home. If your home is 3,000 square feet and your office is 150 square feet, such as, you’d use 5% to calculate your deductions. Not sure how big your house is? Check the documents you received when you bought your home—there’s probably a detailed rendering—or measure the outside of your home and multiply length times width.
What can you deduct?
Once you’ve figured out what percentage of your home you use for business, you can apply that percentage to different home expenses. These include:
Real estate taxes
Utilities (heating, cooling, lights)
Home repairs and maintenance (painting, cleaning service)
Home owners insurance premiums
Just take each cost and multiply it by your home office percentage (the 5% mentioned above). That’s the amount you can deduct as a business expense. So if you spend $150 a month on electricity, you can deduct $7.50 as a business expense. That adds up to a $90 deduction per tax year.
Save bills or cancelled checks to prove what you spent in case of an IRS audit. Take an hour a week to file them away. Also, only repairs are expenses; and improvements depreciated.
Don’t forget depreciation
Depreciation based on the idea that everything—even something like a home—wears out eventually. To figure home office depreciation, start by calculating the tax basis of your home: generally the Sale price plus the cost of improvements, minus the value of the land it sits on. Next, multiply the tax basis by the percentage of your home used for work. This gives you the tax basis for your home office.
Usually, depreciation deductions for a home office are for a 39-year period. There are caveats. For a crash course, read IRS Publication 946 or talk to a tax pro.
Keep in mind that depreciation deductions on your home office increase the amount of profit on a home sale that is subject to taxes. There’s an exclusion of $250,000 of profit if you’re a single filer, $500,000 for joint filers. Consult with a qualified tax professional on how depreciation deductions affect your tax liability when you sell.
This article provides general information about tax laws and consequences, but shouldn’t be relied upon as tax or legal advice applicable to particular transactions or circumstances. Consult a tax professional for such advice; tax laws may vary by jurisdiction
Special thanks to Donna Fuscaldo in her help with this article. Donna Fuscaldo has written about personal finance for more than decade for Dow Jones Newswires, the Wall Street Journal, and Fox Business News. She’s currently a freelance writer with her own home office.
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