Many taxpayers are asking if they will still qualify for the home office deduction in 2018. The tax reform changes signed into law by President Trump in December 2017 made drastic changes to the tax code. It is the most comprehensive tax reform in more than 30 years. One of the big changes was the elimination of the miscellaneous 2% deductions that taxpayers take when they itemize expenses on Schedule A. This means starting with tax year 2018, the home office deduction no longer exists for many taxpayers.
Keep reading for additional details to determine if this applies to you and for answers to the following questions:
With the elimination of miscellaneous 2% deductions, this means the home office deduction went away for many taxpayers in 2018. If you are an employee with a home office, this means you will no longer be able to deduct home office expenses. An employee is defined as someone who usually receives a W-2 and who has an employer that deducts payroll taxes from their paycheck. The employers also are responsible for paying half of the FICA tax (Social Security and Medicare) on behalf of their employees. An employee is further defined as someone who is not self-employed, and the employer can exercise control over when the employee works and what work they do.
It is not all bad news for people that work from home. The IRS expects millions of taxpayers to stop itemizing and choose the standard deduction. Under the new tax reform, the standard deduction nearly doubled, and it will provide the best deduction for many taxpayers. Review the article here to determine if itemizing your expenses is best for your current tax situation.
In the past, you had to itemized deductions to qualify for the home office deduction. With the standard deduction nearly doubled, it will be a more favorable deduction for many taxpayers and makes the issue of the home office deduction unnecessary to consider.
Example. John is a teacher for a private school and has a home office. He takes care of his twelve-year-old nephew. Last year, he filed as head-of-household and had the following expenses:
$1,500 Home Office;
$4,000 Mortgage Interest; and
$2,000 Charitable Donations.
Because his expenses totaled $11,000 and were $1,650 ($11,000 - $9,350 allowable standard deduction for 2017 tax year) more than the standard deduction for head-of-household filers last year, he opted to itemize, so he could qualify for the larger deduction.
Starting with tax year 2018, the standard deduction for head-of-household filers nearly doubled to $18,000. Even if John did qualify for the same deductions as last year, the standard deduction of $18,000 would still get him a much larger tax savings than taking the itemized deduction ($18,000 (standard deduction for 2018 tax year) - $11,000 (itemized deductions) = $7,000 (increased deduction for taking the standard deduction and not the itemized deductions)). Also, as a huge plus, he would no longer need to track his expenses, review utility bills, and calculate square footage. A win-win.
For an employer’s reimbursement of home office expenses, the IRS allows employers to set up a Section 125 Cafeteria Plan. This allows employees to pay for expenses covered under the plan with pre-taxed dollars. If John, in the example above, and his employer agree to set up a Cafeteria Plan to cover his home office expenses, it would look like this.
Example. In 2018, John’s salary was $50,000. John and his employer agreed to a Cafeteria Plan to cover his home office expenses. John contributes $1,500 to the plan to cover his home office expenses.
This allows John to receive the $1,500 before taxes. This gives John the same benefit as claiming the home office deduction because he does not need to pay taxes on the $1,500.
Depending on how the plan is set up, John and his employer may still need to pay FICA (Social Security and Medicare) taxes on the $1,500. If the employer sets the plan up to where FICA is not owed, the employer will save as well, since employers pay half of the FICA tax on behalf of employees. However, this means the employee would have less money paid into Social Security.
For additional information on Section 125 Cafeteria Plans, the IRS has a resourceful FAQ which can be found here.
The home office deduction for business owners was not changed by the new tax reform. This means if you are self-employed as an independent contractor or the owner of a passthrough business entity and use an office in your home:
you may qualify to take the home office deduction on Schedule C.
To take the home office deduction, the IRS requires that a specific part of your home be used exclusively for the business on a regular basis. It can be part of a room or a specific room. Also, it can be a free-standing structure separate from home, such as a: studio, garage, or barn.
To qualify as a principal place of business does not mean it has to be the only place you conduct your business. If you have a separate business location but still use a part of your home substantially and regularly, you may still qualify for the home office deduction.
After the new tax reform was implemented, the IRS updated its page clarifying the home office deduction for small business owners, which can be found here. It reviews in detail the requirements and methods for business owners to qualify and take the home office deduction.
Beginning in 2018, the new tax reform eliminated the home office deduction for employees as a Schedule A itemized deduction. Although this potentially could affect millions of taxpayers, the IRS expects many taxpayers starting in tax year 2018 to take the standard deduction. Since the standard deduction nearly doubles in 2018, it will be the best option for the majority of taxpayers. Also, millions of taxpayers will be able to stop keeping receipts, calculating square footage, and tracking home utility costs. For many taxpayers, this will make completing their taxes much easier.
If you use a home office for the convenience of your employer, you should discuss with your employer options to get reimbursed for this added expense, since you will no longer qualify for the home office deduction.
Small business owners, who use a part of their home exclusively and regularly to conduct a substantially portion of their business may still qualify for the Schedule C business expense for a home office.
Schedule an appointment with the tax professionals at Gudorf Tax Group to review how the new tax reform affects your individual tax situation and whether or not you qualify for the home office deduction.