Working at home has multiple perks—not the least of which is that short commute to your home office in your PJs. (Yes, it’s a cliché, and yes, it happens.) But while you might be incredibly talented at writing novels, designing websites, or whatever it is you do during your 9-to-5 at home, there comes a time of year that trips up almost all of us: tax time.
Granted, working from home—either occasionally or full time—provides plenty of ways to save on taxes. But within those opportunities lie pitfalls galore that could also land you in an audit. To help you stay on the right side of that equation when filing this year, heed these top tax mistakes people make when they work from home—plus whether any rules change next year once President Donald Trump's new tax plan is in full swing.
1. Neglecting to take all your deductions
One of the best perks of working from home is the many deductions you can take for various expenses. However, a few are commonly overlooked, says Josh Zimmelman, owner of Westwood Tax & Consulting, in Manhattan, NY.
For instance? Many don't realize that they can deduct a percentage of their internet, landline, and utilities if they are partly used for work. Work-from-homers can also deduct transportation costs to outside meetings, dues for professional development, and regulatory fees or licenses paid to state or local governments. So if you use any of those, make sure to add them to the heap!
For 2018, the rules change a bit for those who aren't self-employed but work from home for a larger corporation (if you receive a W-2, that's you). Next year, your deductions on Schedule A will be limited to a maximum of 2% of your adjusted gross income. Any costs beyond that won't be deductible, so you'd better start reining in those expenses!
Self-employed individuals, however, are not subject to this cap.
Taking too many suspicious deductions
On the other hand, some freelancers put themselves at risk of an audit by trying to write off bogus expenses, Zimmelman cautions.
“In order for an expense to be deductible, it must be ‘ordinary and necessary’ to run your business," he says. Just because you’re at home while you work doesn’t mean you can write off that fancy new espresso maker, for example; nor should you write off lunch with your spouse at that fancy bistro down the street (unless you're in business together).
Taking an inappropriate home office deduction
Working from home doesn’t automatically mean you can deduct a portion of your rent (or monthly mortgage fees) for the square footage you devote to a “home office.”
There are two main criteria for legally using this deduction, says Jason Miller, tax manager at Nussbaum Yates Berg Klein & Wolpow, in New York City.
- Your home office must be exclusively a home office, not sometimes used for professional use and sometimes for personal use. That means your kitchen counter, guest room, or TV room with a computer don’t count. In IRS parlance, they are looking for “regular and exclusive” use, Miller says.
- Your home office must be your principal place of business. If you work at homeandhave an office outside of the home, you normally would not be allowed to take the home office deduction, he cautions. Exceptions can be made if you hold client meetings in your home, but check with your accountant before taking this deduction if you maintain outside quarters as well.
Commingling personal and busines spending
Too many work-at-home professionals miss out on deductions because their finances are in serious disarray, Zimmelman finds. An easy solution is to carefully track business spending by setting up separate checking, savings, and credit card accounts. You also need to keep meticulous records of what equipment is used for business activities and what is personal. So, for example, if you have one cellphone for both professional and personal use, you can deduct a percentage of the expenses on your tax return, based on the percentage of use.
You’ll need detailed call logs or other documentation to back that up,” he warns.
For 2018 onward, accurate records are still important, but if you’re an employee who files your tax return on Schedule A, that 2% cap might mean you lose some of the deductions you enjoyed in the past.
Thinking credit card statements are sufficient to prove expenses
Do you blithely toss receipts because you consider your credit card statement to be adequate proof of your expenditures? You could be in trouble if you’re one of the unlucky people to get audited.
“The IRS will not accept credit card statement as backup because they do not show itemized details of what was purchased,” says Miller. For example, say you have a charge from an office supply store for $1,500 on your credit card: The IRS cannot determine if you were buying legit office needs or computer components for your teen.
Plus, remember that in an audit, the burden of proof still remains on the taxpayer to prove or substantiate expenses. So, keep saving those receipts! Apps abound so you don't have to stuff them in a shoebox; one's even called Shoeboxed, which scans and saves them for future reference.