(CBS MoneyWatch) This tax season holds good news for millions of self-employed people who work from home: Home office deductions, which used to require a litany of calculations and the completion of a 43-line form, have at last been simplified. The IRS will now allow qualifying taxpayers to claim the deduction by multiplying $5 by the number of square feet of your home that’s exclusively used as an office.
Sound simple? That part is. But determining whether it’s the best method for you isn’t quite as straightforward. That’s because taxpayers can choose whether to use this new simplified method or stick with the old method. And while the older approach was a bear, it might result in a higher deduction.
That’s mainly because the old method allows for writing off depreciation as well as a percentage of the cost of operating your home, including utilities, insurance and maintenance. The simplified method replaces claiming all those individual write-offs, much like taking a standard deduction eliminates your ability to also claim itemized deductions for things like charitable contributions. And the total home office deduction when using this simplified method is capped at $1,500.
The bottom line: Homeowners who use much of their house for work, have an unusually expensive residence or unusually high maintenance costs are likely to get better deductions by sticking with the old system. Renters who use a substantial portion of their apartment or rental home as an office would too.
But everyone else is likely to benefit from the simplified option, which is likely to produce an equally lucrative write-off with a fraction of the hassle. Here’s a simple way to figure out which method is best for you.
First, realize that the rules of what constitutes a deductible home office haven’t changed. The space you claim must be used exclusively for work. (There are special rules for calculating home office deductions for in-home day care centers.) Then, the deduction amounts to a set percentage – or by the simple method, a set dollar amount – of the costs related to that portion of the home.
With the simple method, you’d multiply $5 by the number of square feet used exclusively as an office. If the office was 200 square feet, for example, the deduction would be $1,000. If it were 500 square feet, the calculation would give you a result of $2,500, but you’d be subject to the $1,500 cap — you’d only be able to claim $1,500.
You May Also Be Interested In These Stories
- Former Detective Gets House Arrest For Tax Refund Fraud
- Can’t Pay Your Taxes? Here’s What You Can Do
- 7 Deductions That Lower Your Taxable Income
- What Procrastinators Need To Know About Filing Their Taxes