In recent times there has been a growing trend in working from home rather than going into the office every day, and in most situations, those working from home are eligible to submit expenses and claim tax deductions.
However, before going ahead and trying to claim any tax deductions it is worth researching what you can claim and how so here are some valuable pieces of advice to help you plan your tax if you are working from home.
Understand the Limits of Deductions
For employees working from home, it is crucial that they use a Form 2106 from the IRS to record deductible expenses which are then attached to a Form 1040, the deductible expenses on a Form 2106 are then included in a Schedule A: Itemized Deductions document. According to the tax gurus at Tax Shark, completing the above forms is vital to avoiding a tax bill from the IRS that neither an employer nor employee can afford. It is also worth noting that an employee’s expenses are considered miscellaneous deductions and must follow the 2% rule, meaning that you can only deduct expenses that are greater than 2% of your salary.
Home Office Deductions
One of the reasons people work from home is because it can be more convenient for both an employer, who also may not have to rent as much office space especially if staff live in multiple different locations.
When working from an office at home that is predominantly used for work purposes, it may be possible for the employee to deduct some expenses related to owning or renting a home such as mortgage payments, property taxes, rent, property insurance, and utility bills.
Record Everything and Keep Receipts
To provide a clear reference for your employee expenses and in case any questions come up when the IRS is dealing with your case, it is recommended to keep written records such as in a logbook or on a spreadsheet.
Along with the expenses you record, you should also keep evidence of the expenses in the form of bank and credit card statements, and receipts. For cash transactions, it is a requirement for receipts to show the amount, date, and payee’s details.
Record Travel Expenses
Employees who use their vehicles for business travel or pay for food and accommodation from their funds may be able to declare them as expenses that are eligible for deductions. However, expenses that have already been reimbursed by employers cannot be submitted for a tax deduction, although if they only partially pay the expenses such as the standard rate for business mileage, you can claim the remainder of the mileage as a deductible.
Self-Employed and Independent Contractors
Much like employees who are working from home, individuals who are self-employed or independent contractors are still eligible for similar deductions and must follow the same requirements regarding record keeping. One key difference however is that income and expenses relating to self-employment must be recorded in a Schedule C document which does not have the same 2% ruling on adjusted income.
When net income from self-employment is greater than $400, an individual is liable to pay self-employment taxes and income tax. One way to avoid a large tax bill at the end of the financial year is to estimate and pay tax at different times in the year, which also helps to avoid potential fines for late payment or underpayment.
Dual Residency Could Mean Dual Taxation
The majority of states define a resident as someone who is permanently rather than temporarily residing in a state, and the threshold most states use to determine who is a Statutory Resident is if an individual resides in a state for more than 183 days.
If someone has relocated to another state but is still spending 183 days in their home state then they are likely to be considered a dual resident and liable to pay tax in two states.
It is possible to change your state of residency, although you should check the rules in both states for residency changes. Usually, states do not view you as moving residency without first meeting criteria stating your clear intent to move. Some common tasks you will have to do to complete to change your state residency include updating your driver’s license, mailing address, and voter registration. It is a good idea to hang onto all the documentation relating to a residency alteration in case of any audits.
An increasing number of people are choosing to work from home or have to due to the pandemic. Working from home can be beneficial and flexible for both the employer and employee, however it is a smart move to do some tax research and planning to ensure you avoid larger tax bills and fines.