No matter how much you earn, you will probably keep the tax burden as low as possible, and a good way to do that is to capitalize on the various deductions you are entitled to. Now, as a reminder, when you claim a deduction on your tax return, what you effectively do is exempt from a portion of your income tax. And while many important deductions went away as part of the massive 2018 tax overhaul, a valuable one that still exists is home contract deductions.
Are you eligible for home contract deductions?
To claim home contract deductions, you must meet two criteria. First, you need a dedicated space in your home that is only used for business purposes. This means that if you are a graphic designer who sets up a shop at the kitchen table, it does not qualify, as your kitchen is used for purposes other than work. In addition, your home office must be your primary business location. If you rent office space and use it for 30 hours a week and only work from home 1
Here is another important requirement for home contract deductions: You need to be self-employed to claim it. It used to be that if you were a paid employee who worked from home, you could claim your home office as part of the various installments that once existed under the tax code. However, this deduction was eliminated in 2018 tax refunds, which means that if you are considered an employee of another, you are not allowed to take it.
How to invoke your home contract deduction
There are two methods you can employ to claim home contracts. The first is the simplified method, giving you $ 5 per square foot of office space you maintain, up to a maximum of 300 square feet, or $ 1,500. The second, and potentially more lucrative, method is the standard method, which lets you deduct costs related to having a home office.
There are two different types of expenses you can claim: direct expenses and indirect expenses. Direct expenses include items that are necessary to maintain your home office and do your job, such as writing ink and paper. Indirect expenses are those needed for your home in general, such as heat, electricity and water.
Calculating your direct expenses is easy because you just copy the amounts your receipts show and call it a day. For your indirect expenses, you need to summarize the numbers and claim a proportionate amount based on how much space your office takes up in your home. For example, if you raise $ 20,000 in indirect housing over the year (considering that things like real estate tax also count), and your office takes up 200 square feet in your 2,000-square-foot home, you can claim 10% at $ 20,000, or $ 2000. In this example, it is better to use the standard method to claim home contract deductions than the simplified method.
Don't Get Burned By Home Contract Deductions
Because home contract deductions are often abused by taxpayers, claiming it can increase the chances of an audit. Your best bet is, therefore, to be as truthful as possible when retrieving the deduction, and only printing expenses you have proof of through receipts or paid bills.
Also, be careful when you require direct expenses to your home office. If you earn $ 80,000 a year and buy an office furniture set of $ 8,000, it is technically a valid deduction, but the IRS may notice that you spend 10% of your earnings on it.
Having said that, don & # 39; Don't be afraid to claim expenses that are valid. If you buy new $ 3,000 computer equipment for work, there is no reason not to write it off. Just don't be shocked if the IRS asks to see a copy of the receipt.