Wednesday, January 30, 2013

Home office deduction simplified for 2013

The IRS has recently announced a simpler way for taxpayers to take the home office deduction.  One way to think of it as a "standard deduction" for the home office. This is a step in the right direction to simplifying tax preparation for many people.

The new optional deduction allows a flat $5 per square foot of home office as the deduction.  There is a cap at $1500 (or a space of 300 square feet). The basic rules for what is a home office remain the same; that is, a space regularly and exclusively used for business.

Current law for 2012 tax returns require the taxpayer to calculate the percentage of the home used for business, and also track ALL home expenses to determine the amount of the deduction. This is a lot of record keeping. Tracking utility bills, home repairs, maintenance, improvements, insurance, mortgage and taxes can be time-consuming.  In addition, there is a depreciation component based on the cost of the home. Preparing the tax return requires an allocation of mortgage interest and property taxes between the home office and the Schedule A (itemized deductions).  The flat rate eliminates the need for this.

Of course, it wouldn't be a true American tax law without a few exceptions.  Being optional, taxpayers may find the old way is more beneficial for them.  People who use a large percentage of their home for business may find that the $1500 cap unfavorable.  Also, the $5 amount might not be favorable; your actual cost might be more.

If you're someone who already takes a home office deduction, pay close attention to your 2012 tax return. See if the $5/sq foot rate would be better or worse than your actual expenses.  This will be a clue to what you will probably want to do in 2013.

I think the biggest users of this rule change will be folks with very small spaces used for business, such as the corner of a spare room.  Also it will be good for people who have trouble tracking all of their expense or don't keep good records. Under the old law the time and cost of taking the deduction might not have been worth the tax savings. But with this flat rate, it will be very easy. In addition, the mortgage and property tax are still fully deductible on the Schedule A.

Keep in mind this starts next filing season (tax year 2013).


  1. I'm really glad that the IRS has simplified home office deduction. My wife has a home office, so this is something that has made preparing her taxes in 2013 so much easier. She recently got a new job away from home, so she's going to have to prepare her taxes a little differently next year. Has the home office deduction changed at all? This is something I would like to know, because she said that she's thinking of taking her old job working from home.
    Bill Li |

    1. There are no changes expected to home office deduction rules for 2014 taxes.