Who wants to think about taxes after they’ve just filed their tax return? While it may not be at the top of your list, if you work from home, you may be able to save taxes for 2012 and beyond if you start planning now.
When you work mainly at home (whether your rent or own), your tax-deductible workplace can be an entire room, just part of a room, or even a closet. But … big surprise … there’s a hitch. That space must be used only for your work. Working in your den or on your kitchen table won’t lead to a deduction. Likewise, technically, if you spend any personal time in your workplace, there’s no deduction – that means no pleasure reading, no surfing the web for non-business reasons, no paying bills, etc.
However, if you qualify – and here’s the good part – lots of typical homeowner/renter costs can be used to lower your tax bill. In addition, business mileage at 55.5 cents per mile, furniture and fixtures in your office area, and even part of the cost of your home (or rent) can be deducted. For example: The figures below are for Barbara – a consultant whose home office area equals about 10 percent of the square footage of her house.
Consulting income in 2012 = $ 20,000
Category 1 expenses – for homeowners only – (deduct first)
10% of 2012 real estate taxes and mortgage interest = $700
Category 2 expenses – for homeowners and renters – (deduct second)
2012 costs for items such as:
Supplies, business mileage, ½ of business meals, painting, separate business phone,
computer for business use only, furniture and fixtures = $4,000
10% of 2012 household expenses, such as:
Utilities, trash removal, general home repairs (like roof repairs), homeowner/renter insurance,
house cleaning services, security system, rent = $600
Category 3 expense – for homeowners only – (deduct third)
10% of home “tax depreciation” (explained below): = $513
Total home office deduction ($700+$4000+$600+$513) = $5,813
Taxable income from consulting = $14,187
“Tax depreciation” applies to homeowners but not renters. In the example, it refers to writing off the cost of the portion of Barbara’s home that is associated with her home office space. Assume her home is 2,000 square feet and the size of her work space is 200 square feet (including closets). Thus, 10 percent of her home (200/2,000) is considered to be deductible work space. Further assume Barbara paid $200,000 for her home (excluding the land cost). Gross depreciation is $5,128 ($200,000/39 years). The deductible portion is 10 percent of $5,128, or $513.
For Barbara, her 2012 tax savings could amount to $2,441 ($5,813 deduction x 42% estimated tax rate). The 42 percent rate includes Federal, state, and self-employment tax rates.
Remember, this is only an example. It’s important you keep in mind that deductions are only allowed up to the amount of work-at-home income you earn during the year.
When you’re working at home, record-keeping is key. While it’s not always convenient to hold onto them, you must save receipts and cancelled checks to support your deductions. For mileage and meal costs, keep a log book to track the number of miles driven for each trip, the date, and the topic(s) discussed during each client meeting. Mileage deductions are only allowed if you have a deductible home office space.
So, what’s your next step to make sure you save on your taxes this year? Here are 3 suggestions:
- Talk to your accountant or tax advisor.
- Use TurboTax or a similar program when you file your taxes.
- If you’re interested in all the gory details, check out IRS Publication 587 Business Use of Your Home.
Have a question about your work-at-home deductions? Post them in the comments section below. I’d love to hear from you. Here’s to saving on your taxes in 2012 and many happy returns.
About Jerrold J. Stern, MBA, PhD: Dr. Jerrold Stern is a Professor of Accounting at Indiana University’s Kelley School of Business. He has been publishing tax articles and tax textbooks for over 30 years. While Jerry’s been writing for some time, this is his first blog post online. He offers tax tips, advice, planning, and more. Feel free to review his credentials here.