Tax Deductions for Working from Home Might Not Work the Way You Would Expect!

For the self-employed, home office deductions can be connected to the Schedule C that they include on their 1040, which reports income and expenses for the business.  The home office deduction can be taken with two different calculation options.  One is more complex to calculate and one simplified option is based only on the square footage of the room or area they work from.  This group is not really affected by the Trump tax code changes.  Before those tax code changes, W-2 employees who worked from home also had access to a similar deduction.  Along with other expenses, such as work boots or uniforms purchased by the employee and not reimbursed by the employer, and others, and subject to a 2% exclusion, these expenses could be added to that person’s Schedule A to help reduce taxable income.  The Trump tax changes didn’t harm those workers, as it doubled the standard deduction when it removed those deductions.  With the reality of more people working from home due to COVID safety precautions, there are now more questions and confusion about deducting those home-based expenses.  To be clear, if you are a W-2 employee, you need not keep records of what you buy to facilitate working remotely, as those expenses are not deductible!  However, smart taxpayers can make all of those expenses potentially deductible again, even though they are already benefiting from the much larger standard deduction!  How?  Start a side gig!  Become self-employed as well as being a W-2 employee at home.  First, of course, make sure that isn’t prohibited by your contract with your employer.  If not, then the accommodations you might be making to work for your boss at home could also be part of a new venture!

For example:  Staying home because schools are closed, but able to stay working, Tom had to get a new laptop, have his cable service upgraded, and needed to obtain a desk, chair, and some other items.  These expenses would not be deductible as a stand-alone solution to being laid off or getting reduced pay on family leave.  Tom, however also had been thinking of taking work on fiverr.com and/or other freelance service platforms.   Doing so would make him self-employed and all of those same expenses could now go onto a Schedule C for his new business.  Record keeping around the personal versus business use of those items, to be proper, will need to be kept since when working at the W-2 job, those items are now personal use.  But the benefit is still very much there, as the items become at least partly deductible and can still be taken on top of the new standard deduction.  Self-employment can be so many things, from writing to renting a room with VRBO and on and on.  Keeping good records and understanding the rules at first can be complex, so see a Tax Planner before you head off to staples!