The Internal Revenue Service is offering people who work from home an easier way to deduct the cost of their home offices.
Under the new formula, home-based workers will be allowed to deduct $5 per square foot of office space, up to 300 square feet, for a total deduction limited to $1,500. The new option is available for the 2013 tax year, meaning for tax returns filed in 2014.
If they prefer, they could stick with the old way, which involves adding up all their housing expenses — mortgage interest, property taxes, insurance, electricity and so on — and deducting a percentage that’s equal to the share of the home’s space that is devoted to the office.
So if your home office — which must be used exclusively for work — takes up 10 percent of the space in your home, you could deduct an amount equal to 10 percent of the home-related costs.
The release of the new deduction formula coincides with an upsurge in home-based businesses since the last recession, one of the worst since the Great Depression. According to the American Community Survey compiled by the U.S. Census Bureau, 5.8 million, or 4.3 percent of the U.S. workforce, worked the majority of the week at home in 2010. This is an increase of about 1.6 million since 2000.
Park Ridge, N.J., accountant Thomas Braun predicted the streamlined option will be popular. “A lot of people are going to jump on this,” he said. “It’s going to be very easy to determine. You’re not going to have to worry about getting 12 months of bills together.”
With almost 3.4 million taxpayers claiming home-office deductions nationwide, the new option is expected to cut the paperwork burden on taxpayers by 1.6 million hours a year, according to the IRS.
Braun estimated that 10 percent to 15 percent of his clients take the deduction, which is available both for the self-employed and for those who work for others, but at home.
“It’s taken off in the past 10 years, no doubt about it,” he said. “Telecommuting is very popular.”
In addition, he said, many people who lost their jobs during the 2007-09 recession started home-based businesses. Typically, he said, his clients deduct from $500 to several thousand dollars, depending on the size of their home offices.
Psychotherapist Loren Gelberg-Goff, who sees patients in a 144-square-foot office in her River Edge, N.J., home, said she welcomes the idea of simplifying her paperwork.
“Every year I go through my receipts to see what I paid (on housing) and give the total numbers to my accountant,” said Gelberg-Goff, who has had a home office for 25 years. Because her accountant does the calculation, she said, she doesn’t know what the deduction is worth.
The new option, she said, “would probably save time,” though she said she’d have to check with her accountant to see if it makes financial sense.
Caryn Starr-Gates, who runs a marketing firm out of her Fair Lawn, N.J., colonial, also said she’d be curious to see how the simplified deduction might work for her and her husband, Larry Gates, who operates a music recording studio out of the home’s basement. As it stands now, the two give their accountant their yearly household bills and let him figure out how to handle the home offices.
Source: MCT Information Services