Home office tax deduction worth rumored "red flag?"
April 15, 2008 8:16 AM Subscribe
I'm still debating taking the home office deduction on this year's taxes.
I understand that you are not my accountant.
I am a part-time instructor. I use my home office for grading, answering email from students, and one of the classes I teach is entirely online. I receive a W-2 for the income from all my classes.
I think I'm entitled to the home office deduction but scares me because of the whole "potential red flag" thing (I have an unnatural fear of the IRS despite the fact that I am totally honest on my taxes). Despite this, is it worth it to claim my office? How likely is it to trigger an audit? Is my W-2 information enough to document my use of the home office?
I understand that you are not my accountant.
I am a part-time instructor. I use my home office for grading, answering email from students, and one of the classes I teach is entirely online. I receive a W-2 for the income from all my classes.
I think I'm entitled to the home office deduction but scares me because of the whole "potential red flag" thing (I have an unnatural fear of the IRS despite the fact that I am totally honest on my taxes). Despite this, is it worth it to claim my office? How likely is it to trigger an audit? Is my W-2 information enough to document my use of the home office?
The home office requirements were relaxed a few years ago, and my tax advisor tells me that taking that deduction is no longer the red flag it used to be, but is instead a common and regular deduction.
IANATL
posted by Aquaman at 8:24 AM on April 15, 2008
IANATL
posted by Aquaman at 8:24 AM on April 15, 2008
I would definitely take the deduction if I were you. You have a legitimate deduction.
posted by thomas144 at 9:05 AM on April 15, 2008
posted by thomas144 at 9:05 AM on April 15, 2008
I take the deduction every year and have never been audited.
The square footage of my home office happens to be 1/10 the square footage of my house, so I also take 1/10 of every other home expense (gas, electricity, water, etc).
Anyway, as long as you're being honest on your taxes, an audit is nothing to fear. Deduct away!
posted by iguanapolitico at 9:08 AM on April 15, 2008
The square footage of my home office happens to be 1/10 the square footage of my house, so I also take 1/10 of every other home expense (gas, electricity, water, etc).
Anyway, as long as you're being honest on your taxes, an audit is nothing to fear. Deduct away!
posted by iguanapolitico at 9:08 AM on April 15, 2008
To take the deduction you need to use the home office as your principal place of business or for meeting with clients and customers. See I.R.C. 280A(c).
Based on the facts you gave I can't tell if you'd fit in- you might want to do some more research. Try reading the Treasury regulations- search for Treas. Reg. 1.280A.
posted by ohio at 9:25 AM on April 15, 2008
Based on the facts you gave I can't tell if you'd fit in- you might want to do some more research. Try reading the Treasury regulations- search for Treas. Reg. 1.280A.
posted by ohio at 9:25 AM on April 15, 2008
Best answer: A home office deduction is nothing to be afraid of if you qualify. Most people using the deduction are self-employed and file a Schedule C on which they take the deduction. Since you are not self-employed and get a W-2, you cannot file a Schedule C. Instead you would take the deduction as a miscellaneous itemized deduction on your Schedule A subject to a 2% of AGI threshold. This means the home office deduction would not be of much benefit unless you already have a lot of deductions that qualify you for the itemized deductions above the alternative standard deduction (for example mortgage interest, property taxes, state income taxes). Secondly, as a miscellaneous deduction, you can only take the amount that is greater than 2% of your Adjusted Gross Income. Given these restrictions, the home office deduction may be of very limited value for an employee.
nax: If you own, the home office deduction means that portion of your home is now subject to capital gains when you sell
You are not necessarily required to include depreciation of your home in your deduction if you want to avoid the capital gains complication, although this also somewhat reduces the value of the deduction. You can take all of the other home office deductions and ignore depreciation.
posted by JackFlash at 9:52 AM on April 15, 2008
nax: If you own, the home office deduction means that portion of your home is now subject to capital gains when you sell
You are not necessarily required to include depreciation of your home in your deduction if you want to avoid the capital gains complication, although this also somewhat reduces the value of the deduction. You can take all of the other home office deductions and ignore depreciation.
posted by JackFlash at 9:52 AM on April 15, 2008
When I did my taxes, the Intuit TurboTax website specifically said that taking the home office deduction is not an automatic red flag for an audit.
You are not necessarily required to include depreciation of your home in your deduction if you want to avoid the capital gains complication, although this also somewhat reduces the value of the deduction. You can take all of the other home office deductions and ignore depreciation.
Clarification please (and answergrape, I hope you don't mind my piggybacking): Can you deduct the home office portion of your mortgage without deducting the depreciation?
(I want to avoid the whole capital gains mishegoss, so I was just going to not deduct my mortgage at all. But this seems like a better solution.)
posted by ottereroticist at 11:34 AM on April 15, 2008
You are not necessarily required to include depreciation of your home in your deduction if you want to avoid the capital gains complication, although this also somewhat reduces the value of the deduction. You can take all of the other home office deductions and ignore depreciation.
Clarification please (and answergrape, I hope you don't mind my piggybacking): Can you deduct the home office portion of your mortgage without deducting the depreciation?
(I want to avoid the whole capital gains mishegoss, so I was just going to not deduct my mortgage at all. But this seems like a better solution.)
posted by ottereroticist at 11:34 AM on April 15, 2008
Clarification please (and answergrape, I hope you don't mind my piggybacking): Can you deduct the home office portion of your mortgage without deducting the depreciation?
Absolutely. The mortgage deduction is simply an expense, just like rent or utilities. Depreciation is just one more category of expense. You can you can independently pick and choose which expenses you want to deduct. Although generally you want to deduct as much as you can, there is nothing preventing you from eliminating depreciation if you want to avoid capital gain complications. Mortgage interest is line 10 on Schedule C. Depreciation is line 29.
From the IRS: "... if the taxpayer can establish by adequate records or other sufficient evidence that the amount allowed [taken] as a deduction for any period was less than the amount allowable, the amount taken into account for such period shall be the amount allowed [actually taken]."
The language is confusing but basically if your tax records show that you took less than the maximum allowable deduction, then you only need to take into account the amount that you actually deducted when recapturing depreciation.
posted by JackFlash at 12:35 PM on April 15, 2008
Absolutely. The mortgage deduction is simply an expense, just like rent or utilities. Depreciation is just one more category of expense. You can you can independently pick and choose which expenses you want to deduct. Although generally you want to deduct as much as you can, there is nothing preventing you from eliminating depreciation if you want to avoid capital gain complications. Mortgage interest is line 10 on Schedule C. Depreciation is line 29.
From the IRS: "... if the taxpayer can establish by adequate records or other sufficient evidence that the amount allowed [taken] as a deduction for any period was less than the amount allowable, the amount taken into account for such period shall be the amount allowed [actually taken]."
The language is confusing but basically if your tax records show that you took less than the maximum allowable deduction, then you only need to take into account the amount that you actually deducted when recapturing depreciation.
posted by JackFlash at 12:35 PM on April 15, 2008
Well, I'm going to retract "absolutely" from my answer above. There seems to be some disagreement among tax lawyers. Some consider depreciation mandatory and some do not. You will have to rely on your own tax professional's advice
posted by JackFlash at 1:03 PM on April 15, 2008
posted by JackFlash at 1:03 PM on April 15, 2008
In order to take the deduction you need to use the office regularly and exclusively for your job. The same space can't also be used personally.
posted by itsamonkeytree at 1:39 PM on April 15, 2008
posted by itsamonkeytree at 1:39 PM on April 15, 2008
I did the math and found that the home office deduction isn't that big a deal.
IIRC it's 80% of property value x office proportion (eg. 20%) / 39 years x marginal tax rate (eg. 40%).
Doing the numbers, $350,000 property x 80% x 20% / 39 x 40% = $600/yr savings.
It's something I guess, but as mentioned above you'll have to pay it back if you realize capital gains on the property.
The deduction is a much better deal for renters.
posted by tachikaze at 5:14 PM on April 15, 2008
IIRC it's 80% of property value x office proportion (eg. 20%) / 39 years x marginal tax rate (eg. 40%).
Doing the numbers, $350,000 property x 80% x 20% / 39 x 40% = $600/yr savings.
It's something I guess, but as mentioned above you'll have to pay it back if you realize capital gains on the property.
The deduction is a much better deal for renters.
posted by tachikaze at 5:14 PM on April 15, 2008
Yeah, how much will you actually save? Every year, I total up all my work related expenses, and it never meets the threshold for deductibility. And even if it did, that only means I don't have to pay tax on it. So it ends up being a third.
Also, the rules for the home office deductions do have sole use requirements. As in, if your home office is 1/10 of your house, that 1/10 must be completely dedicated to your business. It also might not count if it's not necessary for your job- are you taking work home because it's more convenient for you, or because it's a requirement of the job?
posted by gjc at 8:37 PM on April 15, 2008
Also, the rules for the home office deductions do have sole use requirements. As in, if your home office is 1/10 of your house, that 1/10 must be completely dedicated to your business. It also might not count if it's not necessary for your job- are you taking work home because it's more convenient for you, or because it's a requirement of the job?
posted by gjc at 8:37 PM on April 15, 2008
Response by poster: I decided to take the deduction since I do have a place set aside specifically for teaching (it began as a way to keep me on task, but I guess it has other advantages). Since I do own a home and deduct mortgage interest, it was worth it to spend the time looking for records.
Thanks for everyone's help.
posted by answergrape at 8:00 AM on April 16, 2008
Thanks for everyone's help.
posted by answergrape at 8:00 AM on April 16, 2008
This thread is closed to new comments.
posted by nax at 8:22 AM on April 15, 2008