One of the significant social side effects of the coronavirus pandemic is that working from home has become the new normal for millions of Americans. Now that the tax session is underway the WFH (working from home) employees may be wondering if they can claim a nice tax break under the Federal Income Tax Home Office Deduction. This is a logical question as most WFH employees shell out cash from their pockets for extra costs like the internet, printer, ink, a desk, a chair, or maybe even a computer and are hoping to recoup some of these expenses.
If you are looking to figure out if you are eligible be aware that the home office deduction has changed over the years. Here is everything you need to know as to who can claim a home office tax deduction and who cannot as well as how much some employees can save.
What Is The Home Office Tax Deduction?
At the basic level, the home office deduction provides a tax break for qualifying taxpayers to deduct certain home expenses on their tax returns. It is not limited to homeowners only but also to renters and people who live in apartments, condos, and other types of homes.
Who Qualifies for a Home Office Deduction?
Though this deduction is called “home office deduction” everyone working from home cannot take advantage of this benefit. At the basic level, home office deduction can be claimed only by self-employed individuals-meaning people who work for themselves and set their own hours or own a small business. The three types of workers who are permissibly eligible for this deduction according to the IRS are:
- Independent contractors
- “Gig economy” workers
The housing-related expenses that are allowable under this deduction are business equipment and housing-related expenses like mortgage, rent, utilities, repairs, and depreciation.
Furthermore, the two most important conditions are:
- The home office must be used regularly and exclusively for your business
- It should be your principal place of business.
Unfortunately, W2 workers working from home due to the Covid-19 pandemic cannot take this deduction. Before the 2018 Tax Cuts and Jobs Act (TCJA) employees working from home for the convenience of their employer could claim employment expenses under the 2% rule. This deduction was eliminated from 2018 to 2025, so employees working from home due to the coronavirus pandemic cannot avail of this tax deduction.
However, if you are a W-2 employee with a side hustle then you can deduct home-office expenses for that particular side hustle.
Some states like Alabama, California, Illinois, Arkansas, New York, Massachusetts, and Pennsylvania have unique state tax options. W-2 full-time workers who are forced to work from home due to the pandemic can deduct all home-office expenses that their employer did not reimburse them for including equipment, cell phone, and internet. However, this deduction may not cover all your 2020 work expenses.
The exact rules change from state to state, so you should check it out with a local tax professional or find the information on your state government’s website that has links to tax information explained in detail.
How W2 Work-at-Home Employees Can Save Money
All is not necessarily lost if you are a W-2 employee forced to work from home due to the pandemic.
- You can ask your employer to reimburse you for your home office expenses. There is something called Section 139 where an employer can reimburse employees for home-office expenses due to a pandemic. It defines these expenses as “reasonable and necessary costs”.
- They can include costs associated with setting up a home-office like buying a chair and desk, equipment, internet, and other expenses. This will be a win-win situation for both employer and employee as the company can take the reimbursement as an expense and can remove it from their income.
- Your company could also consider an “accountable plan”. For example, if your salary is $65000 your employer can pay you $60000 in wages and $5000 as home office expenses. Your salary will be the same but it will help you save on taxes.
This law may change at some point as agencies across the U.S have reached out to Congress and recommended the home- office deduction be relaxed for 2020. So, do keep all the records that are needed to calculate the home-office deduction. You could refer to IRS Publication 587 or consult a tax advisor for more guidance regarding the exact details and circumstances.