What You Need to Know About Home Office Tax Deductions

Guidelines are strict when it comes to qualified expenses. With unemployment near an all-time high, many out-of-work job seekers are setting up shop in their own homes. A home office allows you to claim otherwise nondeductible expenses, such as utilities, depreciation, insurance and repairs.

To take advantage of home office tax deductions, you need to meet all of the very strict IRS guidelines. Be forewarned: the IRS reviews home office claims very carefully. To minimize your risk of an audit, and ensure success if your return is questioned, make sure you meet the qualifications for the home office tax deductions for 2011.

Qualifying for Home Office Tax Deductions 2011

  • Your home office or other designated area must be used exclusively for your business – and that doesn’t mean an area that also serves as the family den. You must use your home office for the most important activities of your business and spend most of your business time in that office. In the case of inventory storage, an area of a room used exclusively for storage meets the test.
  • Day care businesses do not have to meet this exclusivity test. Business use is determined by hours of operation and rooms used by the children for whom care is provided.
  • Occasional or incidental use is not sufficient for home office tax deductions. The area must be used on a continuing basis.
  • The area must be used for business purposes. Hobbies and investment activities do not meet this test.
  • Employees must use the office for the convenience of the employer, and they can have no other office provided to them by the employer. The occasional “work at home” day does not count. In addition, employees are not allowed to rent any part of their home to their employer and claim this income under home office tax deductions.

In addition to the above requirements, the business part of your home must be:

  • Your principal place of business – which is defined as space where you regularly and exclusively manage activities for your business and have no other fixed location for this business, or
  • A place where you meet or deal with patients, clients or customers in the normal course of your trade or business, or
  • A separate structure (not attached to your home) that you use in connection with your trade or business.

Unacceptable home office tax deductions

  • Placing office-type furniture and equipment in various rooms throughout the house so that all or most of your otherwise nondeductible expenses become deductible. It won’t work. Only rooms used exclusively for the business qualify. The square footage of that room determines the business use percentage of your expenses. (Remember that daycare businesses use an “hours of use” rule rather than the exclusive use rule.)
  • Paying family members to do household chores, and deducting the expenses on their business returns. Any wages or contractor fees you deduct must be legitimate business deductions.
  • Creating a “family residence trust.” This scheme includes a very official-looking trust document that could make even the wariest person think it’s legal. The taxpayer’s home is transferred to a trust, and the person who sets up the trust acts as caretaker of the home in exchange for the right to live there. Supposedly this makes all repairs and other expenses deductible. It doesn’t. Because the trust does not have a legitimate purpose, it is disregarded for tax purposes.

The truth is the IRS is cracking down on such schemes, the individuals selling them, and the individuals claiming these deductions. If you have questions, you can get a free 30-minute consultation with an H&R Block tax professional to discuss which of your home office expenses may be deductible.You can file your 2010 tax return online using H&R Block tax prep software that can automatically calculate deductions you qualify for.

Sandwich generation eligible for tax relief for supporting parents

Tax breaks for individuals who are raising children and caring for aging parents

More than 60% of baby boomers are actively helping a parent and half of them also have children under 25. These members of the “sandwich generation” – those supporting their parents and their own children – may be able to claim the up to $3,650 qualifying relative exemption for supporting their parents.

For many members of the “sandwich generation,” balancing the needs of their children and parents is something they do every day. With their predecessors and descendants squeezing them in the middle like pastrami on rye bread, they seek relief wherever they can get it – even from the IRS.

Luckily, these tax breaks could relieve some of the financial burden and put more money in their pockets.

Qualifying Relative Exemption

Generally, the eligible taxpayer must provide more than 50% of the financial support for eligible expenses such as food, lodging, clothing, education, medical and dental care, recreation and transportation. That a parent lives with the taxpayer is not a required to claim the exemption – only that the taxpayer provide more than half of their financial support for eligible living expenses.

There are several tests that an individual must meet in order to be a qualifying relative of the taxpayer, including: The parent must meet the member of household or relationship test, and the gross income test. Additionally, the taxpayer must provide more than 50% of the support for the individual. Eligible expenses for calculating support include food, lodging, clothing, education, medical and dental care, recreation and transportation.

Child Tax Credit

The maximum Child Tax Credit is $1,000 (based on income and filing status) for each qualifying child under 17. Because this is a partially refundable tax credit, even taxpayers who do not owe taxes are eligible if they have earned at least $3,000 in 2010.

The Earned Income Credit (EIC) is a valuable credit for lower-income taxpayers who work. It provides a tax credit for one child of up to $3,050 and a maximum of $5,666 for three or more children, based on income and filing status. These Earned Income Credit and Child Tax Credit Tables for 2010 can help you determine how much you can receive in these child-related tax credits. Remember, tax credit is a dollar-for-dollar reduction of the tax.

Dependent Child Exemption

The $3,650 qualifying child exemption allows taxpayers to claim a dependent exemption for their child, stepchild, adopted child, eligible foster child, sibling or stepsibling, or a descendant of one of these.

Qualifying children generally must: Be under age 19 or under age 24 and a full-time student, and younger than the taxpayer, (or any age if permanently and totally disabled); live with the taxpayer for more than half the year; and not provide more than 50% of their own support for the year.

Child and Dependent Care Credit

The tax credit for child and dependent care expenses allows taxpayers to claim a credit for expenses paid for the care of children under age 13 and for a disabled spouse or dependent. There is a limit to the amount of qualifying expenses. The credit can be up to 35% of your qualifying expenses, depending upon your adjusted gross income.

There are numerous requirements to qualify, including: Dependent child must be age 12 or younger and the care must have been provided so you – and your spouse if you are married filing jointly – could work or look for work. You must identify the care provider(s) on your tax return and it cannot be a spouse. Note that if you pay someone to come to your home and care for your dependent or spouse, you may be a household employer.

H&R Block tax preparation software can help you automatically determine which of these tax savings options you are eligible for, and includes forms needed. Or, if you have questions, you can get a free 30-minute consultation with a tax advisor at an H&R Block office near you.

This article was contributed by Leigh Mutert, CPA and H&R Block Community Manager. H & R Block is not affiliated with LPL Financial.  Please consult a tax professional for your own situation. This information is not intended to be a substitute for specific individualized tax advice.

Creative Commons License photo credit: Pain Chaud

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Comments | 2 Responses

  1. says

    I understand why the home office deduction needs to be so strict — it’s so easy to possibly abuse — but these days it’s so easy to have a real, legitimate business from home and not many people can take a room and make it office-only. I think there needs to be some kind of balance in the law.

    Thanks for the great info!

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