WFH and Your Tax Return: A Guide

SMITH BRAIN TRUST – For many workers, the pandemic has meant working from home, often for months on end. But what does 10 months of remote work mean for your 2020 tax return?

It’s kind of a good news/bad news situation, says Maryland Smith’s Samuel Handwerger.

The first bit of good news is the commuting cost savings. If you’ve been working from home since mid-March, as many people have, you’ve likely spent a lot less on gasoline and public transportation. “Rolling out of bed and opening your work-issued laptop are free,” notes Handwerger, a CPA and a full-time lecturer at the University of Maryland’s Robert H. Smith School of Business.

“But then there are new line items showing up in the family checkbook – like printing costs, and new laptops, routers and router boosters. Families are upgrading their home wifi service to handle the increased demand and need for more speed. They’re seeing increased home utility costs; and the list goes on.”

At that point, he says, “there’s a phone call to me, the accountant.”

This year, the top question on his clients’ minds is: “Since I am working from home, I now have a home office I can deduct, right?”

Well, no, is Handwerger’s typical reply. “That was the case prior to 2018, when employees working from home for the convenience of their employer could deduct the associated costs if they itemized.”

That ended with the 2017 Tax Cuts and Jobs Act (TCJA). Congress nixed that area of the tax law to offset the costs of other tax decreases. “No longer can employees deduct home office expenses,” Handwerger says. “This part of itemized deductions has done a vanishing act.”

But the TCJA also increased the standard deduction substantially, he notes, so for many taxpayers the change was a net tax win. Though not everyone sees it that way when they’re faced with the sticker shock of buying a new laptop. “It certainly makes buying an expensive laptop or tablet easier when your accountant says, ‘It’s deductible.’ ”

So what happens to all those no-longer-deductible expenses? “You might try convincing your employer to reimburse you for your costs at home,” Handwerger says. “To the employer, doing so is a deduction and is not taxable to the employee.”

Taken a step further, the employer could pay its working-from-home employees rent for the use of that space they call a “home office.”

Of course, if that were the case, those employees would have to declare the income from that rental. But home expenses and depreciation could offset the sting of that, Handwerger adds.

Self-employed individuals, on the other hand, don’t have all these constraints under the tax law. “Given the right set of facts and circumstances, the self-employed can deduct all of these home-office costs,” he says. The key to the home-office deduction is to use part of your home "regularly and exclusively" as one’s principal place of business.

And “home office” need not be limited to the home you own. Rental apartments, condos, boats, and motor homes can all qualify, Handwerger says.

However, for filers who work from home for only part of the year, they only can only claim the deduction for the period that satisfies the "regularly and exclusively" requirements.

“Now, note, an employee can also be self-employed,” Handwerger says. “How’s that? Nothing in the tax law prevents an employee from also pursuing a self-employed venture outside of their regular employment.”

In other words, the side hustle.

With a side hustle, those home office costs and the home office related to the self-employed business become deductible, assuming they meet the home office criteria.

“Isn’t it time to start that self-employed photography business you always wanted?” Handwerger says, adding. “OK, hobbies don’t count for the home office deduction unless there’s income.

And those intricate hobby loss tax rules, he says, are a topic for another day.