Tax Guru – Ker$tetter Letter

One of the longest running erroneous assumptions about tax returns has been that claiming a home office deduction is a red flag that will trigger an IRS audit.  That has never been true and a lot of people have overpaid their taxes because of their fear over claiming this perfectly legitimate deduction.  Every year, with the growth of the internet and more people telecommuting from home, more and more people are entitled to claim home office deductions.

Because so many people are claiming this deduction, IRS recently announced that it wants to make it easier to do than having to fill in all of the details on the normal Form 8829.  Of course, this isn’t without a price.  Just as with the IRS’s standard rates for vehicle mileage, the simple method normally results in a lower deduction than keeping track of the actual expenses. 

In Rev-Proc 2013–13 (15 page pdf), IRS lays out a new simplified safe harbor method of claiming the home office deduction for 2013 and future tax returns.  This new method allows a deduction of five dollars ($5.00) per square foot of home office space, up to a maximum of 300 square feet, for a maximum deduction of $1,500.  There is no provision for the different levels of housing expenses in different parts of the country.

In its press release announcing this new method, IRS claims this will save taxpayers 1.6 million hours of work.  That’s a bit of an exaggeration.  Maybe that would be true if each person claiming the home office deduction had to sit down and manually add up all of the household expenses and then prepare the 8829 completely by hand. In real life, with all expenses entered into QuickBooks and computerized tax software, it really only takes a few minutes to enter the info for the 8829.

Possibly people who do their own tax returns (aka Misguided Souls) will want to use this new five dollars per square foot home office deduction; but most people will likely continue to claim the higher actual expense per Form 8829. 

While this new Simpler but Lower home office deduction will probably not be widely used, at least it should once and for all dispel the ridiculous myth that claiming a home office deduction is a guaranteed IRS audit.