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Five Home Office Deduction Mistakes

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If you operate a business out of your home, you may be able to deduct a wide variety of expenses. These may include part of your rent or mortgage costs, insurance, utilities, repairs, maintenance, and cleaning costs related to the space you use.

But the home office tax deduction is a tricky area of the tax code that is full of pitfalls. Some taxpayers are so wary of the deduction that they simply opt not to take it. If you’re in this group, read some of the most common mistakes and then get help.

  1. Not taking it. This is probably the biggest mistake those with home offices make. Some believe the deduction is too complicated, while others believe taking a home office deduction increases your chance of being audited. While the rules can be complicated, there are now simple home office deduction methods available to every business.
  2. Not exclusive or regular. The space you use must be used exclusively and regularly for your business.

Exclusively: If you use a spare bedroom as a business office, it can’t double as a guest room, a playroom for the kids, or a place to store your hockey gear. Any kind of non-business use can invalidate you for the deduction.

Regularly: It should be the primary place you conduct your regular business activities. That doesn’t mean that you have to use it every day nor does it stop you from doing work outside the office, but it should be the primary place for business activities such as recordkeeping, billing, making appointments, ordering equipment, or storing supplies.

  1. Mixing up your other work. If you are an employee for someone else in addition to running your own business, be careful in using your home office to do work for your employer. Generally, IRS rules state you can use a home office deduction as an employee only if your employer doesn’t provide you with a local office to work at.

Unfortunately, this means if you run a side business out of your home office, you cannot also bring work home from your employer’s office and do it in your home office. That would invalidate your use of the home office deduction.

  1. The recapture problem. If you have been using your home office deduction, including depreciating part of your home, you could be in for a future tax surprise. When you later sell your home you will need to account for this depreciation. This depreciation recapture rule creates a possible tax liability for many unsuspecting home office users.
  2. Not getting help. There are special rules that apply to your use of the home office deduction if:

You are an employee of someone else.

You are running a daycare or assisted living facility out of your home.

You have a business renting out your primary residence or a vacation home.

The home office deduction can be tricky, so be sure to ask for help, especially if you fall under one of these cases.

Things to remember

Recognizing the home office deduction complexity, the IRS created a simplified “safe harbor” home office deduction. You simply take the square footage of your office, up to 300 square feet, and multiply it by $5. This gives you a potential $1,500 maximum deduction. However, your savings could be much greater than $1,500, so it’s often worth getting help to calculate your full deduction.

Finally, if you are concerned about a potential future audit, take a photo or two of your home office. This is especially important if you move. That way if you are ever challenged, you can visually attempt to show your compliance to the rules.

Don’t Underestimate the Power of Curb Appeal

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If you want to improve your home’s market value, curb appeal matters. The condition of your front yard, entry area, driveway, and sidewalks will color the impression of everything else a potential buyer sees during a visit. Homes with great curb appeal usually command higher prices and spend less time on the market. Luckily there are simple, inexpensive ways to help your home impress.

  • Make it sparkle. Walk around the outside your house and take note of what looks dirty. Parts of your house that may get grimy over time include windows, downspouts, gutters, siding, and garage doors. These can usually be tackled with soapy water and a scrub brush. For a bigger job, consider using a pressure washer.
  • Coat of paint. Updating the color of your front door, trim, or shutters may help your home look newer and more modern. A gallon of exterior paint costs about $30, so this will probably cost less than $100 overall.
  • Replace hardware. Don’t overlook your house numbers, entry door locksets, doorbells, mailboxes, or light fixtures. These elements add visual interest, but can detract from your home’s appeal after they show years of wear. Replace, clean, or paint pieces that have become dingy or out of date.
  • Mow the lawn. It’s hard to stay on top of mowing when the weather warms up, but a mangy lawn riddled with dandelions won’t make your home attractive. Try to cut it once a week to keep it looking neat.
  • Add landscaping. Planting a tree is a great way to add long-lasting dimension and appeal to your yard. Consider flanking your front door with trees or shrubs. Add a pop of color by placing flower planters on your stoop or adding window boxes to front-facing windows.
  • Install landscape lighting. Outdoor landscape lights lining a sidewalk or driveway provide safety and security, but they can also have big impact on your yard’s appearance. If you’re unable to install wiring for electric lights, solar-powered light fixtures can do the trick.
  • Incorporate outdoor art. Show a little of your personality by adding some tasteful features, such as a birdbath, beautifully arranged rocks, a sculpture, or wind chimes.
  • Upgrade fences and railings. If you have privacy fences or railings leading up to your front door, think about repainting or replacing them.
  • Fix the driveway. Cracked asphalt is not doing you any favors. Fill cracks with asphalt patch and coat the surface with blacktop refinishing compound.
  • Hide your trash bins. Everybody needs trash bins, but nobody likes to look at them. Store them in your garage or hide them behind a fence or enclosure.

Financial Tips to Follow When a Spouse Dies

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The death of a spouse is emotionally and financially devastating. Making decisions of any kind is difficult when you’re vulnerable and grieving, but having a plan to follow may help. Here are suggestions for dealing with financial tasks.

  • Wait to make major decisions. Put off selling your house, moving in with your grown children, giving everything away, liquidating your investments, or buying new financial products.
  • Get expert help. Ask your attorney to interpret and explain the will and/or applicable law and implement the estate settlement. Talk to your accountant about financial moves and necessary tax documents. Call on your insurance company to help with filing and collecting death benefits.
  • Assemble paperwork. Documents you’ll need include your spouse’s birth certificate, social security card, insurance policies, loan and lease agreements, investment statements, mortgages and deeds, retirement plan information, credit cards and credit card statements, employment and partnership agreements, divorce agreements, funeral directives, safe deposit box information, tax returns, and the death certificate.
  • Determine who must be paid, and when. You’ll need to notify creditors and continue paying mortgages, car loans, credit cards, utilities, and insurance premiums. Notify health insurance companies and the Social Security Administration, and cancel your spouse’s memberships and subscriptions.
  • Alert credit reporting agencies. Request the addition of a “deceased notice” and a “do not issue credit” statement to the decedent’s file. Order credit reports, which will provide a complete record of your spouse’s open credit cards.
  • Determine what payments are due to you, such as insurance proceeds, social security or veteran’s benefits, and pension payouts. File claims where needed.
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IRS Issues Tips for Individuals Selling Their Home

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In a “2013 Summertime Tax Tip,” the IRS reminded taxpayers about the current rules on home sales. Here’s a quick review of those rules. Read more