Tag: taxes

If you’re one of the millions of people who worked remotely in 2022, you may be wondering whether that means a sweet deduction at tax time. Hold up, though: The IRS has strict rules about taking the home office deduction — and they changed drastically under the Tax Cuts and Jobs Act, which passed in late 2017.

7 Essential Rules for Claiming a Work-From-Home Tax Deduction

Thinking about claiming a home office deduction on your tax return? Follow these tips to avoid raising any eyebrows at the IRS when you file your 2022 tax return, which is due on April 18, 2023.

1. You can’t claim it if you’re a regular employee, even if your company requires you to work from home.

If you’re employed by a company and you work from home, you can’t deduct home office space from your taxes. This applies whether you’re a permanent remote worker or if your office still hasn’t returned to in-person operations because of COVID-19. The rule of thumb is that if you’re a W-2 employee, you’re not eligible for a work-from-home tax deduction.

This wasn’t always the case, though. The Tax Cuts and Jobs Act suspended the deduction for miscellaneous unreimbursed employee business expenses, which allowed you to claim a home office if you worked from home for the convenience of your employer, provided that you itemized your tax deductions. The law nearly doubled the standard deduction. As a result, many people who once saved money by itemizing now have a lower tax bill when they take the standard deduction.

2. If you have a regular job but you also have self-employment income, you can qualify.

If you’re self-employed — whether you own a business or you’re a freelancer, gig worker or independent contractor — you probably can take the deduction, even if you’re also a full-time employee of a company you don’t own. It doesn’t matter if you work from home at that full-time job or work from an office, as long as you meet the other criteria that we’ll discuss shortly.

You’re allowed to deduct only the gross income you earn from self-employment, though. That means if you earned $1,000 from your side hustle plus a $50,000 salary from your regular job that you do remotely, $1,000 is the most you can deduct.

3. It needs to be a separate space that you use exclusively for business.

The IRS requires that you have a space that you use “exclusively and regularly” for business purposes. If you have an extra bedroom and you use it solely as your office space, you’re allowed to deduct the space — and that space alone. So if your house is 1,000 square feet and the home office is 200 square feet, you’re allowed to deduct 20% of your home expenses.

But if that home office also doubles as a guest bedroom, it wouldn’t qualify. Same goes for if you’re using that space to do your day job. The IRS takes the word “exclusively” pretty seriously here when it says you need to use the space exclusively for your business purposes.

To avoid running afoul of the rules, be cautious about what you keep in your home office. Photos, posters and other decorations are fine. But if you move your gaming console, exercise equipment or a TV into your office, that’s probably not. Even mixing professional books with personal books could technically cross the line.

4. You don’t need a separate room.

There needs to be a clear division between your home office space and your personal space. That doesn’t mean you have to have an entire room that you use as an office to take the deduction, though. Suppose you have a desk area in that extra bedroom. You can still claim a portion of the room as long as there’s a marker between your office space and the rest of the room.

5. The space needs to be your principal place of business.

To deduct your home office, it needs to be your principal place of business. But that doesn’t mean you have to conduct all your business activities in the space. If you’re a handyman and you get paid to fix things at other people’s houses, but you handle the bulk of your paperwork, billing and phone calls in your home office, that’s allowed.

There are some exceptions if you operate a day care center or you store inventory. If either of these scenarios apply, check out the IRS rules.

6. Mortgage and rent aren’t the only expenses you can deduct. 

If you use 20% of your home as an office, you can deduct 20% of your mortgage or rent. But that’s not all you can deduct. You’re also allowed to deduct expenses like real estate taxes, homeowners insurance and utilities, though in this example, you’d be allowed to deduct only 20% of any of these expenses.

Be careful here, though. You can deduct expenses only for the part of the home you use for business purposes. So using the example above, if you pay someone to mow your lawn or you’re painting your kitchen, you don’t get to deduct 20% of the expenses.

You’ll also need to account for depreciation if you own the home. That can get complicated. Consider consulting with a tax professional in this situation. If you sell your home for a profit, you’ll owe capital gains taxes on the depreciation. Whenever you’re claiming deductions, it’s essential to keep good records so you can provide them to the IRS if necessary.

If you don’t want to deal with extensive record-keeping or deducting depreciation, the IRS offers a simplified option: You can take a deduction of $5 per square foot, up to a maximum of 300 square feet. This method will probably result in a smaller deduction, but it’s less complicated than the regular method.

7. Relax. You probably won’t get audited if you follow the rules.

The home office deduction has a notorious reputation as an audit trigger, but it’s mostly undeserved. Deducting your home office expenses is perfectly legal, provided that you follow the IRS guidelines. A more likely audit trigger: You deduct a huge amount of expenses relative to the income you report, regardless of whether they’re related to a home office.

It’s essential to be ready in case you are audited, though. Make sure you can provide a copy of your mortgage or lease, insurance policies, tax records, utility bills, etc., so you can prove your deductions were warranted. You’ll also want to take pictures and be prepared to provide a diagram of your setup to the IRS if necessary.

As always, consult with a tax adviser or consider using tax prep software like TurboTax or H&R Block if you’re not sure whether the expense you’re deducting is allowable. It’s best to shell out a little extra money now to avoid the headache of an audit later.

Robin Hartill is a certified financial planner and a senior writer at The Penny Hoarder. She writes the Dear Penny personal finance advice column. Send your tricky money questions to [email protected].

Unemployment benefits can help cushion the blow when you lose your job. But if you received unemployment compensation in 2022, you may be in for a surprise when you prepare your tax return. That’s because you could owe taxes on your jobless benefits.

How Are Unemployment Benefits Taxed?

Let’s back up: Is unemployment taxable? Unfortunately, the answer is yes — and that can seem like Uncle Sam kicking you when you’re already down.

If you received unemployment compensation in the past, that may come as a surprise. Back in 2021, the American Rescue Plan provided a small measure of relief for people who received benefits in 2020 at the peak of the COVID-19 crisis: The first $10,200 of unemployment compensation was shielded from taxes for households with incomes under $150,000 in 2020.

But that relief measure applied only to 2020. Expect to pay ordinary income taxes on unemployment when you file your 2022 tax return (due April 18, 2023) and in future tax years.

Still, many people are surprised to learn that they have to pay taxes on their jobless benefits. A Jackson Hewitt survey found that 39% of adults weren’t aware that unemployment is taxable.

Here’s a breakdown of how taxes on unemployment benefits work.

Federal Income Taxes

When you receive unemployment benefits, they’re taxed at the federal level as ordinary income.

That means if you got $10,000 from unemployment during a typical year, it would be taxed in the same income tax brackets as it would if you’d earned $10,000 from a job. But you wouldn’t owe payroll taxes, i.e., Social Security and Medicare taxes, on your benefits.

State Income Taxes

At the state level, it looks a little different. You won’t owe state taxes on your unemployment if you live in one of the following nine states that don’t have state income taxes:

• Alaska
• Florida
• Nevada
• New Hampshire (taxes dividends and interest income, but not wages or unemployment benefits)
• South Dakota
• Tennessee
• Texas
• Washington
• Wyoming

Of the remaining 41 states, the following seven plus the District of Columbia exempt unemployment from taxes:

• Alabama
• California
• Montana
• New Jersey
• Oregon
• Pennsylvania
• Virginia

A few others partially tax unemployment, but in most states, your unemployment is fully taxable.

How Do I Pay Taxes on My Unemployment?

There are two basic ways to pay federal taxes on your unemployment. Because the U.S. has a pay-as-you-go tax system, neither answer is “pay it all next year” — though as we’ll discuss shortly, the consequences for doing so aren’t too harsh.

1. Have your state unemployment office withhold it. This is how it works when you’re employed and your employer automatically takes out a portion of your check for taxes. You can opt to have 10% of your benefits automatically withheld, but you don’t get the choice of having more or less withheld. When you first apply for benefits, you’ll have the option of filling out IRS Form W-4V for voluntary withholding. If you’re already receiving benefits, you can still submit Form W-4V to your state office to change your withholding.
2. Pay unemployment taxes quarterly. The IRS says you should make quarterly estimated payments if you expect to owe at least $1,000 in taxes from all your income sources and you haven’t had at least 90% of what you’ll owe for the year withheld. Alternatively, you’re in the clear if you had 100% of the prior year’s tax bill withheld if your adjusted gross income is under $150,000, or 110% if your AGI is over $150,000.

What if I Haven’t Had Taxes Withheld?

There’s no need to panic if you haven’t had taxes withheld on your unemployment compensation.

A lot of people are in that situation. Either they haven’t had taxes withheld because they’ve needed their entire check to survive, or they just didn’t know they had to pay taxes on their benefits.

If you’re still receiving benefits and the 10% withholding wouldn’t threaten your ability to pay for your basic needs, we suggest submitting Form W4-V to your state unemployment office ASAP.

The worst-case scenario: You owe money on Tax Day and can’t afford the bill.

While the IRS may have a reputation for making grown-ups cry, owing money at tax time isn’t as terrifying as it sounds, so long as you file a tax return on time. (You can get more time to submit your return if you file for an extension, but the tax bill is still due on April 18, 2023.)

In most situations, you can automatically get approved for a payment plan that will cost you just 0.5% in interest per month, up to 25% of your overall bill. If you can afford to pay the entire bill within 120 days, you won’t incur additional fees. Otherwise, you’ll pay $31 to set up a direct deposit payment plan online or $107 to set it up by phone or email, or in person.

Of course, the IRS will encourage you to pay as much as you can afford, but you can select a monthly payment that’s as low as the total amount you owe divided by 72.

Fees aside, 0.5% per month works out to 6% per year. By comparison, the average credit card interest rate is over 17%, which makes the IRS look like a pretty generous creditor. For that reason, we’d suggest going with a payment plan when you can’t afford a tax bill, rather than charging it to a credit card.

You may also qualify for certain tax credits that will offset the amount you owe.

Just make sure you file a tax return next year, even if you can’t afford to pay. The failure to file penalty is pretty steep at 5% per month up to 25% of your tax bill.

The bottom line: You will pay taxes on your unemployment compensation. Pay them upfront either automatically or quarterly if you can. But know that if you owe taxes on your benefits next year, that doesn’t spell doomsday for your finances.

Robin Hartill is a certified financial planner and a senior writer at The Penny Hoarder. She writes the Dear Penny personal finance advice column. Send your tricky money questions to [email protected]