Update: December 1 2020
On November 30, 2020, the federal government released its fall economic statement, providing a means to simplify the home office expense deduction. Recognizing the number of Canadians working from home in 2020 due to the pandemic, CRA will allow employees to claim modest expenses of up to $400 in connection with their work from home arrangement this year. As part of this simplified procedure, there’ll be no need for employees to track detailed home offices expenses nor will there be a requirement for employers to issue form T2200.
Although this simplified procedure is good news, as a planning point, it’s still possible for employees to claim the home office expense deduction under the existing rules outlined above. Therefore, an employee should look at their situation and determine what method may result in greater tax savings. However, it should be noted that if an employee decides to proceed under the existing rules, this likely will require form T2200 to be issued by their employer to claim the deduction.
CRA will release further communication regarding this in the coming weeks.
How Much You Can Claim
You can either claim tax relief on:
- £6 a week from 6 April 2020 – you will not need to keep evidence of your extra costs
- the exact amount of extra costs youve incurred above the weekly amount – youll need evidence such as receipts, bills or contracts
Youll get tax relief based on the rate at which you pay tax.
ExampleIf you pay the 20% basic rate of tax and claim tax relief on £6 a week, you would get £1.20 per week in tax relief .
Youll usually get tax relief through a change to your tax code.
What Is The Home Office Deduction
To qualify to deduct the expenses related to your home office from your taxes, you must use your home office regularly and exclusively for business, as well as maintain it as your principal place of business.
Only the amount of space you actually dedicate exclusively to work can be counted. If you work from a desk in the corner of the bedroom, you can deduct only the floor space that holds the desk and other office equipment, but not the entire bedroom. If you also use the desk as a space to do artwork as a hobby, you can no longer claim the deduction, as the space doesn’t meet the exclusive-use standard.
“Be ready for an audit by taking a photo of how your home office is laid out,” advises Luke Frye, a certified public accountant and co-founder of Timber Tax Accounting. “Also, be sure to actually measure the space.”
The home office space you deduct must also serve as your principal place of business. If you have another office somewhere else or get business mail delivered to another address, you can’t claim the deduction.
“Don’t be afraid to take the home office deduction if you rightfully qualify for it,” says Frye. “That’s what it’s there for.”
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What Is The Work
Technically, the tax benefit you can get for working from home isnt a tax credit at all, its a tax deduction. The difference is subtle, but important. Tax credits directly reduce the amount of tax you owe tax deductions reduce your taxable income.
If you work for an employer from home, youre generally allowed to claim the cost of home office expenses to help reduce your taxable income, which may result in a smaller income tax bill.
In response to the COVID-19 pandemic, the Government of Canada established a simplified method to claim the work-from-home deduction for the 2020 tax year. The method has since been extended to cover the 2022 tax year.
The simplified system doesnt require you to keep supporting documents. Your employer also doesnt have to complete and sign Form T2200S or T2200. Basically, you can claim $2 for each day you worked at home in 2022 due to the COVID-19 pandemic. Theres a cap of $500, which covers 250 working days.
Nerd Tip: The working-from-home tax credit is only for employees who work from home its separate from work-related expenses that you can deduct as a self-employed individual. If you run your own small business or do freelance work from home, youll want to investigate Canadas business-use-of-home tax credits and deductions.
Lets Take A Look At An Example
In this case, an employee was required to work from home from March 1 to July 31 due to COVID-19 restrictions.
Total square footage of home
1,500 square feet
Number of months working from home
Total eligible home office expenses over time period
Based on this example, the employee would be allowed to claim a $500 deduction in connection with their home office expenses, calculated as follows:
Now, if the employee was in a 40% marginal tax bracket, this would translate into $200 of tax savings .
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Who Qualifies For This Tax Credit
Not all first-time home buyers would qualify for the First-Time Homebuyer Act of 2021. These are the proposed eligibility requirements:
- Being a first-time home buyer: you cannot have owned a home for the past 3 years and you must be purchasing your primary residence
- You must not have previously used the first-time home buyer tax credit, and you cant purchase a home from a relative
- Income requirements: your income must be no more than 60% above the median income for your area. Exact income eligibility requirements depend on your income tax filing status.
- Age: you must be at least 18 years old
If you meet the eligibility requirements, you would be eligible to get a tax credit for 10% of your homes purchase price, up to a maximum of $15,000.
Will I Get Audited By The Irs If I Take The Home Office Deduction
It is a common belief that claiming the home office deduction will automatically trigger an IRS audit however, while the IRS rules about home office deductions are very strict, it’s not automatic that you will get audited simply for claiming your home office. There are measures you can take to reduce your chances of getting audited.
Before taking the home office deduction, youll want to make sure your business qualifies to avoid claiming any deductions you arent eligible for. Maintain records of all your business expenses and purchases, and ensure that your residence, home office usage and type of employment qualify for this expense.
The IRS has an automated system that helps detect red flags. The system will compare your tax situation and deductions to others in your industry. If you claim something that others in your profession dont generally claim, the system may see that as a red flag, which could lead the IRS to investigate.
Additionally, the system will flag those who claim too much space for a home office. An example of this would be claiming your office space takes up 80% of your residence, as opposed to most people in your profession claiming their home office uses 10% of their residence. The IRS could see this as a discrepancy and conduct an audit.
Regardless, if you do decide to take the home office deduction, it’s essential to follow the IRS guidelines to the letter, as they change somewhat frequently.
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Here Are Some Things To Help Taxpayers Understand The Home Office Deduction And Whether They Can Claim It:
- Employees are not eligible to claim the home office deduction.
- The home office deduction Form 8829 is available to both homeowners and renters.
- There are certain expenses taxpayers can deduct. They include mortgage interest, insurance, utilities, repairs, maintenance, depreciation and rent.
- Taxpayers must meet specific requirements to claim home expenses as a deduction. Even then, the deductible amount of these types of expenses may be limited.
- The term “home” for purposes of this deduction:
- Includes a house, apartment, condominium, mobile home, boat or similar property.
- Also includes structures on the property. These are places like an unattached garage, studio, barn or greenhouse.
- Doesn’t include any part of the taxpayer’s property used exclusively as a hotel, motel, inn or similar business.
Tips To Prepare For Taxes
If you think you might be eligible for any of these work-from-home tax deductions, keep track of your expenses and receipts during the year. When you file your taxes, you can submit these costs as business deductions. You won’t have to submit your actual receipts, but hold onto them until the IRS approves your return just in case they ask for verification.
For the home office deduction, measure the approximate square footage of your office compared to the rest of your home. This is the percentage of your rent or mortgage and utilities you can deduct. For example, if your home office makes up 20% of your home, you could deduct up to 20% of these bills.
It’s a good idea to talk with a tax specialist for additional information. You should also ask them to give you updates if anything changes. The government continues to pass bills related to COVID-19, so it’s possible Congress could add new deductions to help employees working from home in addition to what’s already been passed.
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Tax Tip : Consider Taking The Direct Method If It Provides A Bigger Deduction
The other way to claim the home office deduction is by using the direct method. This involves tracking all of your home office expenses in addition to any costs related to repairing and maintaining the space. Further, you can claim deductions for a portion of other expenses based on the proportion of the space to the rest of your residence.
Change In Ohio’s Municipal Income Tax In 2021 Could Mean Big Work From Home Tax Benefits
At Ken-Mar Tax we’re continuously looking for ways our tax preparation clients can pay less taxes, which is why Ken Weinberg earns an additional 72 hours of education every three years, from an IRS CE provider, to maintain the special designation of an IRS Enrolled Agent. The low-lying fruit this tax season is this change in Ohio’s municipal income tax law for the tax year of 2021 that would benefit remote workers and lead to work from home tax benefits. A Cleveland.com article, “Paid income tax for a city you didnt work in in 2021? Heres how to get your refund” details multiple examples of when to pursue a refund and when it won’t be applicable to your work from home situation. < < print version > >
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Taking On The Potential Talent And Tax Implications Of Remote Work
Deloitte can help your organization evaluate and establish temporary and future remote work programs. We can help analyze your current remote workforce approachesincluding those implemented rapidly in response to COVID-19. We can also help your organization develop and execute a future-forward remote work strategy that aligns with business objectives: Employees may benefit from increasing their well-being, job satisfaction, and work-life balance, and the business benefits from lowering overhead costs and becoming more attractive to top talent. We do this through the three major components of our remote work approach:
Deduction Of Medically Necessary Home Improvements
You may qualify for a medical expense deduction if you install special equipment in or make modifications to your home for medical reasons. Common examples of medically necessary upgrades to a home include adding ramps, widening doorways, installing handrails, lowering cabinets, moving electrical outlets, installing lifts or elevators, changing doorknobs, and grading the ground to provide access to the home. Costs for the operation and upkeep of these upgrades are also deductible as medical expenses if the upgrade itself is medically necessary. However, improvements that simply make your home more elderly-friendly arent deductible if theyre not medically necessary.
There are some limitations, though. You have to itemize on Schedule A to claim the deduction, and you can only deduct medical expenses that exceed 7.5% of your adjusted gross income. The deduction is also reduced by any increase in the value of your property. So, for example, if you spend $50,000 to install an elevator, and that increases your homes value by $40,000, you can only deduct $10,000 . And, again, the upgrade must be for a medical reason.
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Home Accessibility Tax Credit
If you meet one of the following three criteria, the Home Accessibility Tax Credit could help you save taxes on an eligible renovation costing up to $10,000:
- Youre homeowner and you qualify for the disability tax credit
- Youre eligible to make a claim for a qualifying individual
- Youre over 65 years old
The renovations have to be permanent, make the home more accessible or reduce the potential harm to the qualifying individual, and be completed by qualified professional tradespeople.
What Documentation Is Needed
If your employer requires you to work from home, its necessary that they complete form T2200, Declaration of Conditions of Employment, for you to deduct employment expenses related to your home office. In ordinary times, even though form T2200 is somewhat complex and burdensome for employers to complete, its still a relatively straightforward procedure, and if you are a regular work-from-home employee this is a form that you would have likely received in the past. The problem is, were currently not operating in normal times. Therefore, this presents a challenge for employers to prepare the form and for employees to obtain the form, given the vast number of people across an organization whove been required to work from home during the pandemic.
Nonetheless, the good news is that regardless of what solution CRA settles on in terms of documentation, there should be a way for employees to deduct home office expenses during this pandemic year and for all intents and purposes beyond this year. Our recommendation is to continue to keep track of your home office expenses while keeping an eye on the CRAs final decision in terms of the required documentation as more information should be forthcoming soon.
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Learn About Claiming Education Benefits
An education credit helps you pay education expenses by reducing the amount you owe on your tax return. There are two types of education credits:
- The American Opportunity Tax Credit helps with expenses during the first four years of higher education. You can get a maximum annual credit of $2,500 per eligible student. If the credit lowers your tax to zero, you may get a refund.
- The Lifetime Learning Credit can be used toward tuition payments and related expenses. To use the credit, you must attend a qualifying educational institution. Use the LLC for undergraduate, graduate, and professional degree course expenses. Or use the credit to help pay for classes that improve job skills. You can claim up to $2,000 per tax return, and there is no limit on the number of years you can claim the credit.
You must meet income limits to be eligible for these credits. And you cant claim both credits for the same student and the same expenses.
If You Aren’t Eligible
While employees who now work remotely may feel like they’re missing out, the home-office deduction isn’t generally leading to outsized savings for those who take it.
The $1,500 maximum for the simplified deduction generally equates to about 35 cents on the dollar for most taxpayers, said Markowitz. That ends up being about a $525 write-off, he said.
In addition, taking the deduction could make it more difficult to sell your home in the future, if you own. That’s because you can depreciate the value of your home office, which could create a tax event later when you sell.
Still, that doesn’t mean the home-office deduction isn’t worth taking if you’re eligible for it.
“If you’re eligible for it and the government is going to give you the money for it, you should take it,” Markowitz said.
How The Deduction Works
There are two ways that eligible taxpayers can calculate the home-office deduction.
In the simplified version, you can take $5 per square foot of your home office up to 300 square feet, giving the method a $1,500 cap.
This home office needs to be only used for your business as in, it can’t be a guest room with a desk in it and you must be able to prove that you need an office for your work. The burden of proof for taking this deduction is on the taxpayer, so if you’re audited, you will have to back up your claim to the IRS.
The regular version of the deduction is a bit more complicated, as you must keep track of all your actual expenses. You can write off up to 100% of some expenses for your home office, such as the cost of repairs to the space.
You can also deduct a portion of other expenses, including utilities, based on the size of your office versus your home. For example, if your home office is 10% of your entire living space, you can deduct that much from the costs of mortgage, rent, utilities and some kinds of insurance. IRS Form 8829 will help you figure out the eligible expenses for business use of your home.
Because of this calculation, people with larger homes may not get as much using this method, said Markowitz. You can switch methods year to year and should try to calculate both to see which will yield a larger deduction.