| Here's a comment I received from a tax client recently: | | | | sewer and trash service), homeowner's association |
| "Why do people make such a big deal about the home | | | | dues and depreciation. Let's say all those items add up |
| office deduction? It's not really worth that much, is it?" | | | | to $2,500. Then you multiply $2,500 by 20% to arrive |
| Like most tax questions, the answer to this question is | | | | at $500, which is the actual amount of your home |
| "It depends." It depends on two key factors that | | | | office deduction. |
| contribute to the calculation of this deductible small | | | | Of course, your numbers will likely be different than the |
| business expense. Read on to find out whether it is | | | | ones used in the example above, but that's basically |
| worth it for you. | | | | how this deduction works. If you happen to rent your |
| The two main factors that determine the amount of | | | | home rather than owning it, you would use your annual |
| your home office deduction are: 1) Business use | | | | rent expense instead of the mortgage interest, and |
| percentage, and 2) Home-related expenses. Let's take | | | | you probably won't have any property taxes. |
| a closer look at each of these items so you can get a | | | | So you've got a deduction of $500. If you are in the |
| general idea of how much money you'll save by taking | | | | 30% federal tax bracket (15% for income tax plus 15% |
| this deduction. | | | | for self-employment tax), $500 times 30% is $150, |
| Business Use Percentage. You need to know two | | | | which is your actual tax savings. For some, $150 may |
| things for this: the square feet of your home office | | | | seem like an insignificant amount and not worth the |
| and the square feet of your house, apartment or | | | | record keeping and tax reporting requirements. Others |
| condo. How do you determine that? Easy: with a tape | | | | would be glad to have an extra $150 in their pocket |
| measure. If you don't know the square feet of your | | | | instead of Uncle Sam's. The choice, of course, is yours. |
| office, take out a tape measure and find out. The | | | | I would challenge you to consider this simple fact: |
| same holds true for the square feet of your home. | | | | many small deductions add up to big tax savings. If |
| Then you take the home office square feet, divide it | | | | you can take the deduction, take the deduction. How |
| into the total house square feet and you now know | | | | much time will it take you to do the bookkeeping |
| the business use percentage of your home office. | | | | necessary to save $150? If it takes you an hour, |
| Here's a simple example: Your home office is 15 feet | | | | you've just paid yourself $150 for an hour's work, |
| by 20 feet, or 300 square feet. Your house is 1,500 | | | | which is a good wage in any economy. |
| square feet. 300 divided into 1,500 is 20%. Your | | | | Of course, if your house is bigger than the example |
| business use percentage is 20%. So you get to take a | | | | used above, and/or your business use percentage is |
| deduction for 20% of various home-related expenses, | | | | greater than the above example, you could save |
| detailed below. | | | | significantly more than $150. Some self-employed |
| Home-Related Expenses. Here's where you do get to | | | | people realize a tax savings of hundreds or even |
| do even more number crunching. Add up all the | | | | thousands of dollars each year via the home office |
| following annual expenses: mortgage interest, property | | | | deduction. As mentioned earlier, it all depends on the |
| taxes, homeowner's insurance, repairs and | | | | numbers. |
| maintenance, utilities (such as gas, electricity, water, | | | | |