Self-employed and contract workers aren't the only people working from home. When the pandemic hit, many business employees started working remotely. This meant some homeowners and renters needed a home office. And whether the IRS would let remote workers take a home office deduction became the big question.
Tax Cut and Jobs Act
The Tax Cut and Jobs Act (TCJA) changed how employees could deduct home office space from their federal income taxes. Before 2018, unreimbursed home office expenses could be taken as a deduction on an income tax return. Up to 2 percent of an individual's adjusted gross income (AGI) could be deducted. It might not sound like a lot, but it was a good tax break.
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In 2017, the TCJA made significant changes to U.S tax laws that went into effect in 2018. One of those changes was eliminating the unreimbursed home office expense for most employees working remotely. It affected anyone who was a W-2 employee. As a result, millions of employees lost job-related tax deductions including home office deductions. In 2015, that number was 14.6 million remote workers who were taking advantage of those itemized deductions.
An employee with impairment expenses or certain performing artists can deduct by itemizing on Schedule C.
Still No Home Office Deductions
COVID-19 and the necessity to work remotely failed to change this federal tax law. Despite the pandemic, the home office deduction is suspended until 2026. This means that not only can't a remote employee deduct a home office, but they also can't deduct any other employee expenses they incur on their employer's behalf. Besides the home office tax deduction, the TCJA eliminated deducting business travel expenses, moving expenses for a job and supplies like computers or paper.
Consider also: What Your Home Office Does to Your Flexibility
Exceptions to Remote Lost Deductions
There are a few exceptions to remote workers who can deduct a home office on their tax returns. For instance, an armed forces reservist or a fee-based or local government official can itemize a home office deduction on their income taxes.
An employee with impairment expenses or certain performing artists can also deduct by itemizing on Schedule C.
Self-Employed Keep Home Office Deductions
Non-employees, such as the self-employed, independent contractors or freelancers, are not affected by the TCJA when it comes to deducting a home office as long as the home office is their principal place of business. They can still file it on Schedule C or Schedule F for the IRS.
The IRS also offers simplified option for self-employed taxpayers. This option provides for a standard deduction of $5 per square feet of the home used for business; however, the deduction cannot exceed 300 square feet.
The simplified option also allows home-related itemized deductions, which can be claimed on Schedule A. Examples include real estate taxes and mortgage interest. But a self-employed taxpayer cannot deduct depreciation or even later recapture depreciation with the simplified option.
Consider also: List of Tax Write-Offs for Self-the Employed
What Can Remote Workers Do?
If you are an employee working remotely, there is an option. Have a discussion with your employer. Ask to be reimbursed for expenses incurred while on the job. This includes being given a home office allowance, which is often a realistic expectation.
Some states require employers to reimburse remote employees. For instance, California Labor S Code 2802 states that an employer must reimburse employees for any costs associated with the discharge of the employer's duties.
Nine other states besides California allow a home office deduction for employee work expenses. These states include New Hampshire, Pennsylvania, North Dakota, Illinois, Iowa, Massachusetts, Minnesota, Montana and South Dakota.
Working remotely has become common in the United States. According to Everhour, over 26 percent of all U.S. workers will be working remotely through 2022. Before coronavirus struck, only 6 percent of U.S. employees worked at home.
Despite the lack of a home office deduction and other business expenses, working remotely has financial advantages. Employees who work remotely have reported saving anywhere from $700 to $7,000 a year. This is due to eliminating childcare costs, commuting, car maintenance costs, etc.
- U.S. News: Can You Take the Home Office Tax Deduction
- Provident CPAs: COVID-19 and the Home Office Deduction
- inDinero: Secrets of a Home Office Tax Deduction Revealed
- IRS: Simplified Option for Home Office Deduction
- NOLO: How the Tax Cuts and Job Act Affects Employees
- Paycor: Remote Reimbursement - Planning for 2021 and Beyond
- Everhour: Remote Work Statistics (coming up to 2022)
- NCCI: Remote Work Before, During and After the Pandemic