Working from home has a lot of perks such as saving a ton of commuting time. You can work in your sweats! You can enjoy privacy and be more productive due to lack of interruptions.
Working from home can provide many ways for you to save on your taxes. However, with these opportunities also comes dangerous pitfalls that you need to avoid in order to avoid having to be audited.
Here are the five most common mistakes to avoid!
1. Neglecting to take all your deductions – One of the best benefits from working from home is all the tax benefits. Some commonly missed tax deductions are failing to deduct a percentage of their landline, internet services and utilities if they are partly used for work. You can also deduct transportation costs from your home to meetings. You can deduct things such as licensing fees, regulatory fees and the cost of classes for professional development.
The rules are changing for those who work at home but are not self-employed. The deductions that you can take on your schedule A will be a maximum of 2% of your adjusted gross income. So, if you have been spending a ton of money on expenses you may want to cut back.
If you are self-employed the rules remain as before.
2. Taking too many tax deductions that are suspect. Don’t try to write off bogus expenses such a new fancy microwave or lunch with your spouse in a fancy restaurant unless your spouse is in business with you
3. Taking inappropriate home office tax deductions – Just because you are working from home it doesn’t necessarily mean that you can deduct a portion of your rent, mortgage for the square footage that is your office.
According to tax experts there are two main criteria for legally using this deduction.
1) Your home office must be exclusively your office. So, don’t think of using part of your kitchen, media room or a bedroom that is also used for personal use.
2) Your home office must be your principal place of business. If you work at home and have an office outside the home, you normally couldn’t take the deductions. An exception is if you hold client meetings in your home. However, I would check with your accountant first before claiming a home office deduction. If you are employed and have an office elsewhere you can’t claim your “home office” any longer. Self-employed employees are still in the clear.
4. Comingling personal and business spending – Avoid this trap by setting up a separate savings, checking and credit card accounts. You also need to keep very careful records of what equipment is used for personal reasons and what equipment is used for business reasons. If you have cell phone that you use for personal and business use you need to keep separate logs if you are going to deduct a portion of your cell phone bill for business.
5. Thinking credit card statements are sufficient to prove expenses. Don’t just toss receipts because you think that your credit card statement is adequate proof. The IRS won’t accept credit card statements because they don’t itemize details. There are apps out there like “Shoeboxed” which scans and saves them for future reference.
As for me I work partially out of my library and enjoy total privacy and receive inspiration from my Central Park views. I occasionally meet with clients and my team here. The perks to me are “priceless” As far as tax deductions on my “home office” I don’t claim deductions for the space because it is also for personal use.