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Taking the Simplified Home Office Tax Deduction in 2023
Taking the Simplified Home Office Tax Deduction in 2023
The pandemic caused millions of people to work from home, but long before the lockdown, there were many professionals who had been working from home, including self-employed individuals, freelancers and independent contractors, also known as 1099 employees.
Unlike full-time W-2 employees, whose employers automatically deduct taxes from their wages, these self-employed individuals are responsible for their own taxes. When you're self-employed, you're in charge of finding work, setting up income streams from multiple sources, working on daily tasks and estimating your self-employment tax. If your taxes are atleast $1,000, you have to make quarterly tax payments to the IRS.
Working as a self-employed individual comes with a lot of work-related expenses, and you can write off most of them to lower taxable income when paying 1099 employee taxes. The home office deduction is one of the write-offs that can help lower your taxable income the most.
Key takeaways:
- There are two different methods of calculating the home office deduction.
- The simplified method is based on the square footage you use for your office.
- The actual expense method factors in square footage and other home office expenses.
Table of contents
Who's eligible for a home office tax deduction in 2023?...Read more
How to calculate your home office deduction?...Read more
Different methods to calculate home office deductions...Read more
What's the regular method of calculating home office deductions?...Read more
The simplified method for calculating the home office deduction...Read more
Who's eligible for a home office tax deduction in 2023?
Any self-employed individual is eligible for the deduction if they use a part of their home as office space. Most people think claiming the home office deduction leads to an audit risk. That's just a myth. As long as you provide relevant proof, the IRS won't have any problems. According to the Internal Revenue Service (IRS), a self-employed person can have multiple business ventures but can only use one home office space to do the work. This means that you can be a freelance social media marketer, an artist and a cake maker, but the area you use for work needs to be in the same building.
Or, if you are a dentist and you run a clinic from your home, you probably have a waiting area and a separate place to see your patients in the same building. If the waiting area is adjacent to your home, you won't be able to claim the expenses related to that area as a home office deduction in 2023. If you own your home, you can't write off your mortgage as a deduction but you can write off the mortgage interest.
You also can't use your home office for anything other than the trade or businesses that you have already declared with the IRS.
How to calculate your home office deduction?
The most important thing to know about the home office deduction is the square footage of the area you use for work in your home. This can be a home you own or rent.
To find your home office deductions for 2023, you can use a home office deduction calculator. But first, you'll have to know how to qualify for home office deductions.
Let's say that you own a home and use 20% of the area for your office work. Your qualifying expenses for home office deduction will be proportional to the home office area.
In a rented apartment, the amount of rent you pay becomes part of the equation. Let’s say you use 15% of an area as a home office in a rented apartment. You pay $1,100 in rent and $290 for utilities, which makes your monthly home expense $1,400. At 15% percent usage, you can claim $210 each month for a total of $2,520 for the year.
Different methods to calculate home office deductions
The two different methods to calculate your home office deduction 2023 are the actual expenses method and the simplified deduction method.
If you choose the actual expense method, you’ll need to consider the exact square footage used for your business in the home office. With the standard simplified method, you can only claim a home office deduction on pre-set square footage limits.
What's the regular method of calculating home office deductions?
This method includes your actual home office expenses. If you choose this option, you'll need to consider all your home expenses like electricity, water and internet bills, and any expenses from home repairs. You'll then have to find the percentage of space you use for your home office and multiply that number by the total amount of expenses related to your home.
Let's say your utility bills and repairs cost $5,600 for the year, and 40% of your home's space is your office. Your home office expenses by percentage would be $2,240.
This method is the right choice when you think your expenses will exceed the amount offered in the standard home office simplified method.
The simplified method for calculating the home office deduction
The home office simplified tax method, also known as the standard home office deduction, is a standard rate set by the IRS. You still have to calculate the home office's square footage, but you can't factor in your utility bills or home office repairs, which makes the home office simplified deduction less flexible. But the deduction amount may be bigger this way. It all depends on your specific situation.
The IRS set the standard deduction amount for every square foot of home office space to $5 in 2023. The limit that the IRS places on the number of square feet that can be claimed as space for the home office simplified method is 300. This makes $1,500 the max for a home office tax deduction in 2023.
If you choose the actual home office deduction method for a 250-square-foot office in your 1,000-square-foot house, you can deduct 24% of your home office expenses from your taxes. If your home expenses total $4,200 for the year, including utility bills and routine maintenance, you can deduct 25% of them, or $1,050.
If you use the simplified tax method, you'll have to multiply the square footage used for the office by $5, which brings your total home office deduction to $1,250. Clearly, the simplified method saves you more.
Choosing the simplified method to claim the home office tax deduction is an easy way for self-employed individuals to save money on their tax bill. You can also claim the standard or itemized deduction when paying federal taxes to save more money. You can always reach out to an expert tax professional if you feel like you need more guidance.
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