What is the Home Office Tax Deduction?

You may be eligible for a Home Office Tax Deduction if you use part of your home for a business use. This Home Office Tax Deduction can be used for all types of homes, and it is available for both homeowners and those who rent.

Who can use the Home Office Tax Deduction?

You can use this Home Office Tax Deduction if you use a portion of your home, either owned or rented, for your business. You must have a set room for regular and exclusive use for conducting your business.

You must also use this set, exclusive room for your principal place of business. If you own an office outside of the home but occasionally work from home, this wouldn’t be eligible for the home office deduction. However, if you own a location outside of the home but also use your home substantially and regularly for business, you can qualify for this deduction.

You may also qualify for this deduction if you are an employee and use part of your home for business use.

Options to Calculate Home Office Tax Deduction

There are two methods for filing for this deduction. First, the Simplified Option, allows you to multiply a prescribed rate by the allowable square footage (300 square foot maximum) of the office.

The current rate is $5 per square foot of home used for business.

Second, you can do the regular method which determines the actual expense for the home office including mortgage interest, insurance, utilities, repairs, and depreciation.

Here is more information on the Home Office Deduction provided by the IRS.

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If you and any of your dependents have had a significant amount of medical expenses over this past tax year, you may be eligible to claim a medical tax deduction.

Medical Expense Threshold

The Medical Expense deduction is not meant to cover typical taxpayer expenditures from visiting a doctor a few times a year, filling one or two prescriptions, etc. In order to claim medical expenses as a deduction, you must prove that your health expenditures for the past year have made a significant dent in your budget. The way that you do this is by meeting a certain threshold of medical expenses in proportion to your income. By law, you may deduct only the amount by which your total medical care expenses for the year exceed 10% of your adjusted gross income for 2013.

Author’s Note: With the healthcare reform law, the threshold amount was raised from 7.5% to 10% for the 2013 tax year:

  • Medical Expense Deduction Threshold for 2012: 7.5%
  • Medical Expense Deduction Threshold for 2013: 10%

What Can and Cannot be Included in the Medical Expense Deduction

According to the IRS, medical care expenses include “payments for the diagnosis, cure, mitigation, treatment, or prevention of disease, or payments for treatments affecting any structure or function of the body.” As with any regulation, this definition is not clear cut in what is and is not included.

Here are some examples that are not included in meeting the medical expense deduction:

  • Funeral or burial expenses
  • Over the counter medications
  • Toiletries (toothpaste, cosmetics, etc.)
  • Most cosmetic surgery
  • Nicotine gum/patches that do not require a prescription
  • Maternity Clothes
  • Health Club Dues

Some other rules also apply. For example, you cannot prepay medical services and take the amount as a tax deduction; the medical expenses can only be used towards your itemized deductions once the service has been rendered. Also, any medical expenses paid with pre-tax dollars cannot be claimed towards the itemized deduction (think Flexible Spending Accounts where you already receive a tax benefit). In addition, you cannot use the medical expense deduction if you are claiming the same amount under the Self Employed Health Insurance Deduction. One final rule is that the amount of premium paid by your employer does not count towards the threshold.

Here is a comprehensive list of what can and cannot be included in meeting the threshold to claim the medical tax deduction.

People may think that the mileage tax deduction is only for employer expenses, such as traveling for your own business or using your personal car to travel for an employer. Both of these scenarios make you potentially eligible to claim the mileage tax deduction on your taxes. However, there are several other scenarios where you can potentially claim a mileage tax deduction.

How to Claim Mileage Deductions

Mileage Used While Volunteering

There are three categories you must fulfill in order to take a mileage deduction from volunteering. First, the organization that you volunteered for must be recognized by the IRS. Second, you cannot have been reimbursed by the organization for your personal car gas expenses. Third, you must itemize your tax deductions.

The 2013 mileage rate for volunteer personal car expenses is $0.14 per mile. Instead of deducting the mileage rate, you could choose to deduct the actual expenses (gas, oil, parking, tolls, etc.).

Mileage Incurred When Moving for Work

If you use your personal vehicle to move for a new job, you are not reimbursed for moving expenses by your new employer, and you itemize your tax deductions, you can take a mileage tax deduction for moving in addition to other moving costs.

The standard mileage deduction for moving expenses is:

  • $0.19 from January-June 30, 2011
  • $0.235 from July 1-December 30, 2011
  • $0.23 for 2012
  • $0.24 for 2013

Mileage Incurred During Eligible Health Expenses

You must have incurred medical expenses of 7.5% or more of your Adjusted Gross Income (AGI) in order to take a medical expense deduction. You can include the cost of transportation to and from medical care in your calculation to see if you qualify for the medical expense deduction, including travel by bus, taxi, train, plane, ambulance, the transportation expenses for a parent that must accompany a minor for treatment, the transportation expenses of a nurse or other person who must accompany someone who cannot travel alone due to medical reasons, the transportation costs to visit a medically ill patient if these visits are recommended as part of treatment.

If you are eligible to deduct health care expenses and used a personal vehicle, you can choose between deducting actual personal car expenses incurred (gas, oil, parking, tolls, etc.), or the standard mileage rate of $0.23 for 2013. This changed from $0.19 from January-June 30, 2011 and $0.235 from July 1-December 30, 2011 and $0.23 in 2012.

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When you file your taxes, you have the option to either claim the standard deduction or itemize your deductions. While the standard deduction is a set amount, itemized deductions will vary from person to person.

As such, if you have a large number of itemized deductions you will likely be able to reduce your tax liability.

Itemized Deductions

The most popular itemized deduction is mortgage interest. Taxpayers may deduct interest paid on up to $1,000,000 of mortgage debt. Other itemized deductions include:

  • Medical and Dental Expenses: Previously, you could deduct eligible expenses exceeding 7.5% of your AGI. Starting with 2013, this has changed to 10% of your AGI.
  • Deductible Taxes: You may deduct state, local, and foreign sales, property, income and vehicle taxes.
  • Mortgage Points: You may deduct points paid as part of obtaining a mortgage.
  • Charitable Contributions: You may deduct charitable contributions of cash and property, subject to certain limits and requirements as outlined in Publication 526. If your contribution exceeds certain amounts, you may need to file Form 8283.
  • Miscellaneous Deductions: You can deduct other items if they exceed 2% of your AGI. Deductible items in this category include unreimbursed employee expenses, including education, and tax preparation fees. For more on itemize taxes, see Publication 529. Those who are self-employed can also take a number of deductions against their income.

Can I Itemize?

If a married couple chooses a filing status of Married Filing Separately and one spouse chooses to itemize deductions, the other is not eligible for the standard deduction.

While you do not have to submit proof of your itemized deductions, the IRS reserves the right to request documentation. Be sure to only claim deductions for which you have receipts or other proof of the transactions.

How to Itemize

  • Add up all of your itemized deductions.
  • Compare your itemized deductions to the standard deduction to see which is larger. You can claim the deduction which will allow you to pay the least amount of tax.
  • Itemize deductions on Schedule A.

Tax Form to File to Itemize Tax Deductions

Itemized Deductions are claimed on Schedule A, which is filed with the 1040.

Filers who itemize tax deductions may not use the shorter forms 1040A or 1040EZ.

Teachers often spend money out of pocket on supplies for their classroom. If you are a teacher make sure you are taking advantage of a tax deduction specifically for you.

The Educator Expense Deduction, which is also referred to as the tax deduction for teachers, is a $250 tax deduction.

What is the Educator Expense Deduction?

If you are an eligible educator as defined by your state, you can deduct any unreimbursed expenses you occurred for your classroom during the school year. This deduction can consist of anything that you spent money on for your classroom that came out of your own money and you were not reimbursed for by the school.

Expenses can include any books, supplies, computer equipment, software, and other supplementary supplies. For physical education or health related classes, any equipment related to athletics can be deducted.

Who Can Claim the Educator Expense Deduction?

Eligible educators are grade school and high school (kindergarten through grade 12) teachers, instructors, counselors, principals, and aides. This deduction is not eligible for parents who home school their children.

You also have to work 900 hours during the school year to qualify for the deduction.

Educator Expense Deduction Rules

You cannot claim both a deduction for Educator Expenses and the same deduction for Unreimbursed Employee Expenses.

In addition, the expenses must exceed any tax-free withdrawals from:

Educator Expense Tax Deduction

The deduction is the total amount you spent in this tax year. You can deduct up to $250 or $500 if you are married filing jointly and both spouses are educators.

This deduction is one of adjustments that will lower your Adjusted Gross Income. Claim your educator expense deduction 2014 on line 23 of Form 1040 or line 16 of Form 1040A. You do not need to itemize to claim this tax deduction.

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Come tax time, everyone is looking for a way to lower the amount of taxes they owe. It reminds me of an old episode of The Cosby Show where Cliff is trying to justify that every purchase they made for a given year should be considered a tax deduction. He even goes to talk about how he should get more money because of what he has to put up with in regards to his children. It was a great episode. In this post, I am going to highlight seven commonly overlooked tax deductions. Make sure you review the list before filing your taxes so that you don’t miss out on claiming any one of them.


Photo Courtesy: Stuart Miles

Commonly Overlooked Tax Deductions

  1. State Sales Tax.
    Most people thought or still think that this itemized deduction expired. It actually did at the end of 2011. But on January 1, 2013 it was retroactively put back into effect for the 2012 tax year by Congress.

    This deduction allows you to deduct state income taxes paid or state sales taxes you paid, whichever one gives you a larger deduction. If the state you live in does not have a sales tax, then your deduction is limited to sales tax paid. The IRS has a calculator on its website to help you determine how much sales tax you paid, but as of this writing, is still not updated for 2012.

  2. Charitable Deductions.
    Most readers know that you can deduct charitable gifts on your taxes. What I am talking about here are the smaller charitable gifts you made that you might overlook. Think about when you are at the grocery store and the cashier asks if you want to donate $1 to a certain organization. While $1 doesn’t seem like much, when you think about all of the one-off times you made a donation in the year, it could add up to a sizable amount.

    Be sure also to take into account everything related to charity. Did you make a meal for a soup kitchen? If so, the purchasing of the ingredients can be written off. As can mileage if you used your car for charity during the year. You can deduct $0.14 per mile driven plus the cost of tolls and parking.

  3. Job-Hunting Expenses.
    If you areunemployed and looking for work, you can deduct some of the cost of looking for a new job in the same field of work. To be able to claim the deduction, the expenses must total 2% or more of your adjusted gross income. Be sure to review what is and is not allowed to be deducted when it comes to job-hunting expenses. These change all of the time and some that you wouldn’t think are allowed to be deducted can be and others that you think would be allowed are not.

    Note to those looking for their first job, your job-hunting expenses are not allowed as a deduction.

  4. Child Care Credit.
    Depending on your income, you can qualify for expenses you pay for child care while you work. Generally, you can deduct between 20%-35% of what you pay for child care. What makes this even better is that this is a credit and not a deduction. This means you get a dollar-for-dollar match to reduce your income tax as opposed to a deduction which is only worth your underlying tax bracket.
  5. Jury Pay Paid to Employer.
    Many employers still pay you your wages when you are out on jury duty. The only caveat is that when you receive your pay from serving on the jury, you must turn that check over to your employer. Seems innocent enough, but the problem is that you are required to include jury duty pay on your taxes. Because you paid your employer your jury duty check, you can deduct the amount you give to your employer.
  6. Baggage Fees.
    Paying those annoying baggage fees when you fly irritates most everyone. If you are self-employed and are flying for business, be sure to include these fees to your deductible travel expense file.
  7. Reinvested Dividends.
    This one is a little misleading as you cannot really deduct reinvested dividends on your taxes. However, if you do reinvest your dividends, know that each reinvestment increases your cost basis. This reduces your taxable capital gain when you sell shares. If you do not account for the reinvested dividends in your calculations, you will be hit with paying tax twice: first when the dividend was paid to you, and again when you go and sell the investment.

    Beginning in 2012, the IRS requires mutual funds to track the cost basis for you. However, this is only for transactions that occur in 2012 and beyond. Any shares that you bought or reinvested prior to 2012 you have to continue to track on your own. So it is best to make sure that you have correct information regarding your cost basis when it comes to reinvested dividends.

    If you need help with this, be sure to reach out to your mutual fund company. I know for me a few years back I needed cost basis information and my mutual fund company sent me a printout of all of my purchases, sales and reinvested dividends. It was truly a life saver when it came time to file my taxes.

Final Thoughts

With the tax law changing every year and the fact that Congress implements new tax laws at the last minute (and can retroactively make expired laws relevant again) it’s critical to stay on top of the latest tax news. Your best bet is to either hire a CPA that you know stays up on the latest tax news or if you file your taxes yourself using a software program like TurboTax, to make sure that it is always up to date. If you calculate your taxes on your own, make sure to read any tax news so that you are up to date on what you can and cannot deduct. Doing so will ensure that you pay only what you are required to pay.

Are there any other tax deductions that you think most people overlook?

More on Tax Deductions

If you are self-employed or were self-employed during any time of the past year, it is possible that you are able to deduct your medical and dental insurance coverage that you paid for. The tax deduction is called the self employed health insurance deduction.

Do I qualify for the self employed health insurance deduction?

If you are or were self-employed, you are eligible. Besides yourself, your spouse and any dependents can qualify as well.

You can only claim this deduction if you were not eligible to take part in an employer-subsidized health plan of your own or your spouse’s.

Self Employed Health Insurance Deduction Rules

The only health insurance premiums that can be written off are for the months when both you and your spouse were not eligible to participate in an employer-subsidized health plan. For example, if your spouse worked for 6 months at a job that offered the option to join the insurance plan, you both are not eligible to claim those months. In addition:

  • Your deduction cannot exceed the income you collect from your self-owned business.
  • You cannot claim your health insurance costs if you are reporting a tax loss from your self-employment job. However, you still can claim the cost of your health insurance as an itemized medical deduction.
  • You do not need to itemize medical expenses to take the deduction. However, if you claim the self-employed health insurance deduction you must reduce your Medical and Dental Expenses deduction on Schedule A by the same amount.

Where can I find the self employed health insurance deduction?

The deduction is included on Form 1040, line 29. It may be helpful to look at Publication 535 for more information on the self employed health insurance deduction.

More Self Employed Tax Topics

Looking for unemployed tax deductions? You’re in luck, there are several tax deductions related to unemployment, job searching, or moving for a new job that will give you tax relief at a time when you probably need it most.

Unemployment reached 10% in the United States for 2009, sending over 16 million people home without their normal paychecks. Some politicians and statisticians argue that the number is actually higher than 10% because the way that the information is gathered on unemployed people means that some people who are technically unemployed are not counted at all, including people who have been unemployed so long that they have simply just stopped looking for a job, or people who are underemployed (i.e. working part-time, but want more hours).

Update: New for 2012, the IRS added additional Unemployed Tax Relief waiving the failure to pay penalties for six months for unemployed taxpayers.

Tax Exempt Unemployment Payments

Typically if you receive unemployment from the government, you have to pay income taxes on all of it. With the passing of the American Recovery and Reinvestment Act, the first $2,400 of any unemployment compensation you received in 2009 is not taxable.

Update: The $2400 exclusion expired in 2009, and was not included in the Obama Tax Cuts. Therefore, you cannot claim the exclusion on your 2010 or 2011 taxes.

In order to take this tax exemption, on the 1099-G form you receive from the government, subtract out $2400 from the amount in Box 1, and then report this new amount on line 19 of Form 1040, line 13 of Form 1040A, or line 3 of Form 1040EZ. You can file a 1040EZ online for free.

Note: You will not receive an unemployment W2 form, which is a common misconception.

Tax Deduction for Employment Search

You can deduct certain job search expenses so long as you are searching for a job in the same occupation, you itemize your taxes, and your miscellaneous itemized deduction write-offs (where you will be taking the job expense deductions) is greater than 2% of your adjusted gross income. If you are temporarily working in another field while looking for a job in the same occupation as before, then you can still take this tax deduction.

The following job search expenses are tax deductible: resume preparation, postage, copying fees, headhunter fees, meals while traveling (up to 50%), and mileage (for going to and from interviews, job counselors, etc.). These costs cannot be reimbursed by a potential employer.

Tax Deduction for Moving Expenses When Moving for a New Job

Did you move to take a new job? To qualify for the moving tax deduction, your new job must be at least 50 miles farther from your old home than your old job location was. Also, you must work at the new job for at least 39 weeks during the first 12 months after you move in the area of your new job.

If you qualify, you can deduct “reasonable” costs associated with your move, such as the cost of traveling from your old home to your new home, and the cost of moving your family members, including gas mileage, airfare, parking, tolls, etc. You can also deduct the cost of packing up your belongings and moving them, as well as connecting and disconnecting utilities, shipping your car and pets to your new home, the cost of storing your belongings within any period of 30 consecutive days after the day your things are moved from your former home and before they are delivered to your new home, and lodging while in-transit.