Don’t shy away from a home office deduction

  • Claiming a home office deduction is easier now, partly because Congress recognized that the work force has changed. Many more people are working out of their homes, so it’s not the audit red flag that it used to be. If you legitimately qualify for the deduction, there should be no problem. People who have no fixed location for their businesses can claim a home office deduction if they use the space for administrative or management activities, even if they don’t meet clients there. But you must use the space exclusively for business.

 

  • You are entitled to write off expenses that are associated with the portion of your home where you exclusively conduct business (such as rent, utilities, insurance and housekeeping). The percentage of these costs that is deductible is based on the ratio of the square footage of the office to the total area of the house. A middle-class taxpayer who uses a home office and pays $1,000 a month for a two-bedroom apartment and uses one bedroom exclusively as a home office can easily save $1,000 in taxes a year. People in higher tax brackets with greater expenses can save even more.

 

  • One home office trap that used to scare away some taxpayers has been eliminated. In the past, when you sold your house, whatever portion of your home was an office did not qualify for the tax-free treatment given to the rest of your house. But the Congress has had a change of heart. A home office still qualifies for tax-free profit. You do, however, have to pay tax on any profit that results from depreciation claimed for the office after May 6, 1997. It’s taxed at a maximum rate of 25 percent. Depreciation produces taxable profit because it reduces your tax basis in the home; the lower your basis, the higher your profit.

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