Maximizing Home Office Deductions

Find out how your home office expenses help reduce your taxes.
With limits on SALT and mortgage interest deductions, your home office can help you deduct more of your property taxes and mortgage interest.
There are many tax benefits for having a home office. You can deduct the percentage of your square footage that is dedicated to your office from your mortgage interest, homeowner dues, property taxes, utilities, and other expenses.
You are already able to deduct some mortgage interest and property taxes as itemized deductions, but you may be able to deduct even more as business expenses.

The home office deduction is taken in Schedule C. Lowering your self-employment/Schedule C income has several benefits such as reducing your Social Security/Medicare taxes. If your AGI (adjusted gross income) goes below certain thresholds, you might become eligible for Roth IRA retirement contributions, reduce or avoid the 3.8% tax on investment income, be eligible for medical expenses deductions, and anything else that has an AGI limit.
So even if you are deducting the same amount of property taxes and mortgage interest overall, you get more benefits by deducting some of them as business expenses.

If you already have $10,000 in state taxes (any combination of state property or income taxes), then the property taxes on the proportion of your home office are only deductible as business expenses. That can help you deduct more of your state taxes since the 2017 $10,000 limit on deducting state taxes from federal taxable income.

The amount that you can deduct from your mortgage interest, however, does not help you get past the mortgage interest deduction limits which were reduced from a balance of $1 million to $750,000 in 2017. The IRS worksheets subtract the mortgage interest for your home office from the total allowed interest deduction. So you are shifting deductions from personal itemized deductions to business deductions which lowers your AGI and has other benefits as mentioned before. But it will not help you deduct more interest overall than would have been allowed if you had no home office.

Many people think that the calculation for total allowed interest deduction happens after the business home office deduction. People think that if they have a $1 million mortgage where 25% of their house's square footage is a dedicated home office, that they will be able to deduct interest from $250,000 as a business and then get to deduct the interest from the remaining $750,000 as a personal deduction. Unfortunately that is not the case and it's hard to understand the calculations by reading the IRS rules or filling out forms in TurboTax.

The home office deduction does help you if you take the standard deduction instead of itemizing deductions. If you are a married couple filing jointly and all your deductions such as state income tax, mortgage interest, and charitable contributions are less than $25,000, then you would not be deducting any mortgage interest nor property taxes. (85% of Americans take the standard deduction). But with the home office, you are deducting some of the mortgage interest and property taxes on Schedule C and you can still take the full standard deduction.

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We believe this information to be accurate but we make no guarantees about it.