Along with the mortgage interest deduction, mortgage credits, deducting points and capital gains tax breaks on the sale of a home, your residence provides a bounty of tax relief for living there, but it also offers breaks if you work there too.

If you work at home and want to save money with the new, liberalized rules for 1999 home office deductions, become familiar with them now so you can assess your situation and be sure you will be able to validate your claims.

More than 1.5 million Americans claim the deduction and cut an average of $2,000 from their tax bill, according to Working Today a non-profit advocacy group for self-employed workers.

"There's been an explosion in the number of people working out of their homes, so this is a fast-growing issue," says Joe Schwartz, president of the California Society of Enrolled Agents.

Here are some basic facts to consider if you work at home:

• A home office may qualify for deductions if you use it for administrative or management activities of your trade or business if there is no other fixed location to conduct such activities.
• The home office deduction is available to you whether you rent or own.
• If you rent, figuring your home office deduction is pretty simple. Just multiply your annual rent payment by the percentage of the total space occupied by the office. That prorated portion can also be applied to utilities, insurance, repairs and maintenance.
• If you own your home, possible home office deductions include a portion of mortgage payment, real estate taxes, depreciation, utilities, insurance, repairs and maintenance.
• There are limitations to home office deductions based on your income. The taxpayer must be able to itemize deductions, using Schedule A. The home office deductions -- along with other miscellaneous deductions -- must exceed 2 percent of your adjusted gross income. For the self-employed, home office deductions, other than mortgage interest and real estate taxes may not exceed your self-employed net income reported on Schedule C.
• Some types of home-based businesses helped by the new rules are employees who telecommute to the main office, doctors who bill from home, tutors who grade from home, plumbers and other tradespeople who perform their duties at job sites, as well as outside salespeople who call on customers.
• The business use of an employee's home must be for the convenience of the employer and the employee must not be renting the office space to the employer.
• Be aware that claiming home office deductions can reduce the $250,000 (single filers) and $500,000 (joint filers) exclusion from tax of the gain from the sale of a qualified principal residence. The portion of the home used for a home business isn’t eligible until two years after its converted back to residential use.

"Each case is unique and should be evaluated before making a decision," says Schwartz. "Now is the time to make that evaluation, and for those who decide to claim home office deductions, be sure the necessary record-keeping is occurring." Hiring an enrolled agent, certified public accountant or other tax professional isn't a bad idea either.

Home office deduction resources

• FindLaw.com's Home Office area
• Quicken's Home Office Deductions Area
• Home Office Computing magazine
• U.S. Internal Revenue Service's Forms and Publications Search Engine -- search for "home business

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Published: June 11, 1999

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