Home Office Deductions

10/14/24 • 1 min

An often-overlooked deduction for self-employed individuals is the home office deduction. This allows you to write off a portion of your home expenses as business expenses. To qualify, you must use a specific area of your home exclusively for business purposes. There are two methods to calculate the home office deduction: the actual expense method and the safe harbor method. The safe harbor method lets you deduct a flat $5 per square foot of your home office, up to 300 square feet or $1,500. You can choose the method that provides the greatest deduction. The actual expense method involves using a percentage of your total home expenses. This percentage is determined by dividing the square footage of your home office by the total square footage of your home. You can then deduct this percentage of all your home expenses, including mortgage interest, rent, insurance, utilities, and repairs and maintenance. Note that expenses specific to areas outside the home office, like lawn maintenance, do not qualify. Consult your CPA to determine if you qualify for the home office deduction and which method is best for you.

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Tax Benefits of Retirement Accounts

What is the best account to use for your retirement savings, a 401(k) or an Individual Retirement Account (IRA)? Each has pros and cons. With a 401(k), you can set aside more each year (up to $23,000 in 2024, or $30,500 if you’re over age 50). It’s easy for an individual to set up, as your employer typically handles deducting your contributions from your paycheck and depositing them into the account. There are no income limits, and often employers offer matching contributions to boost your savings. IRAs are a bit more flexible than 401(k)s. You can make contributions until the filing deadline (usually April 15 of next year), whereas 401(k) contributions generally must be made by December 31 of this year. You can contribute any type of earned income to an IRA, so you don’t have to rely on your employer to offer the plan. However, you are responsible for setting aside and making your contributions. The max contribution to an IRA is lower ($7,000 in 2024, or $8,000 if you’re 50 or older), and there are income limits that apply if you or your spouse are also covered by an employer plan. There are also many other types of retirement plans to consider, especially if you're self-employed, such as SEPs and SIMPLEs. It’s best to confer with your advisers to determine which plans are best for your circumstances.

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Tax Credits vs. Deductions

Understanding the difference between tax deductions and tax credits is essential for effective tax planning. Tax deductions reduce your taxable income, which means their value depends on your tax rate. For example, a $1,000 deduction saves you $240 if you’re in the 24% tax bracket. Tax credits, on the other hand, provide a dollar-for-dollar reduction in your tax liability. So, a $1,000 tax credit reduces your tax bill by $1,000, regardless of your tax rate. This concept applies to both federal and state income taxes. Generally, tax credits are available for more specific categories of expenditures, such as education or energy-efficient home improvements, while deductions often cover broader categories like mortgage interest or charitable donations. Credits usually come with more eligibility requirements and often require additional forms and supporting documentation. Deductions, while still requiring proper documentation, tend to be simpler to claim. Consult your tax advisor to understand which deductions and credits you qualify for and how to maximize your tax savings.