The upside of fired: Home office savings

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If you are newly self-employed, you may not realize that your home office can save you serious change on your taxes—as long as you don’t work exclusively from bed or the kitchen table.

“If you work from home and you have a separate area set aside specifically for your office, no matter what size, you can take a home office deduction,” says Koreen Jervis, a downtown accountant and president of Korje Tax Professionals.    

How much you can write off depends on how big your home office is:  If it takes up 10 percent of your living space, you can subtract 10 percent of the amount you pay for certain home-related expenses from the amount of income on which you owe taxes.  Deductible expenses include mortgage interest, maintenance or common charges, property taxes,  alarm system, property insurance, and most utilities including telephone and internet service. 

For example, say you earn $15,000 this year and your home office occupies 10% of your apartment.  Now say your total annual outlay on the eligible expenses listed above is $50,000.  Ten percent of $50,000 is $5,000, which you can subtract from your taxable income. At tax time you will owe taxes on $10,000 instead of $15,000.

In addition, all the money you spend outfitting your home office (desks, bookshelves, rugs etc) is 100% deductible: Spending $1,200 carving out your home-office nook means you can deduct $1,200 from your taxable income.

While home office deductions used to boost your risk of being audited, that is no longer true, says Jervis.     

“The IRS used to require that services be performed in the home office,” she says. “Now they’ve changed their tune. Your home office can be the place where you take care of the administrative part of your business.”