How to Claim the IRS Home Office Deduction while Living Abroad

How to Claim the IRS Home Office Deduction while Living Abroad
May 19, 2022

Americans living abroad can claim many of the same tax deductions as those living in the US. One example of this is the IRS home office deduction. This allows self-employed expats who work from home to reduce their US tax bill.

Here’s what you need to know.

What Is the IRS Home Office Deduction?

The home office deduction lets self-employed taxpayers deduct expenses related to their home office from their taxes. These expenses include:

  • Mortgage payments (if the home is owned)
  • Rent (if the home is rented)
  • Utilities
  • Maintenance costs
  • Repair costs
  • Upgrade costs
  • Real estate taxes
  • Depreciation
  • Insurance costs

Can I Claim the Home Office Deduction while Living Abroad?

Yes. As you may know, all US citizens are required to file a tax return every year no matter where they live. Fortunately, the IRS provides several options for expats to reduce or even erase their US tax bill, such as the:

  • Foreign Earned Income Exclusion
  • Foreign Tax Credit
  • Foreign Housing Exclusion

In addition to these, Americans living overseas may also claim many of the same deductions as Americans living in the US. This includes the home office deduction.

Not every expat will be eligible, however. You will still have to meet the same requirements as a taxpayer living in the US.

Am I Eligible for the Home Office Deduction?

The rules for claiming the home office deduction are the same regardless of whether you live in the US or abroad. This boils down to four basic qualifications:

  • You must be self-employed
  • You must exclusively use your home office for work
  • You must regularly use your home office for work
  • Your home office must be your principal place of business

Let’s take a closer look at each of these qualifications.

1. Self-Employment

To claim the home office deduction, you must be at least partially self-employed. Remote employees are not eligible to claim this deduction, even if their home office meets every other rule on this list.

However, you can claim the home office deduction if you are a remote employee as well as self-employed.

For example, let’s say you work remotely as a programmer for a tech company. Recently, you’ve also started a side gig as a self-employed freelance programmer. Even if you use your home office as both an employee and a business owner, you may still be able to claim the home office deduction.

2. Exclusive Use

This may be the hardest aspect of qualifying for the home office deduction. The room you choose for your home office must be used exclusively for that purpose. It doesn’t count if your “home office” is your kitchen table or a desk in the corner of your bedroom. It must be a space dedicated to your work.

Of course, this doesn’t mean you can’t make a brief personal call from your office or talk to a family member who popped their head in during your workday. Still, you should do your best to limit non-work activities while you’re in your office.

Pro Tip: Your home office doesn’t have to take up an entire room. You can set aside a portion of a larger room to be an office. Just be sure to establish a clear dividing line, such as a partition, and use the designated section only for work.

3. Regular Use

“Regular use” is somewhat vague, and the IRS doesn’t offer a clear definition. We can reasonably assume that this means that if your “home office” is an empty room that you use once in a blue moon for business calls, it won’t qualify. On the other hand, if you work in your home office consistently, even for only a few hours per day, it probably meets this standard.

Unfortunately, this means that most digital nomads are not eligible to claim the home office deduction. A digital nomad would rarely be in one place long enough to use any room regularly.

4. Principal Place of Business

Finally, your home office must be your “principal place of business.” If you spend too much time working at another fixed location, your home office won’t qualify. Don’t worry—working at a coffee shop every so often is still fine. You just can’t work outside your home on a regular basis.

There are two major exceptions to this rule.

First, even if your profession requires you to work outside your home, you can still claim the home office deduction as long as you use your home office to meet with customers or to perform “substantial administrative tasks.”

For example, if you work as a plumber, you will perform most of your job in your customers’ homes. But if you have a dedicated home office that you use for:

  • Scheduling appointments
  • Estimating projects
  • Invoicing customers
  • Bookkeeping

…then it may still qualify as your principal place of business.

The second exception to this rule is if your home office is in a free-standing structure separate from your house, such as a:

  • Studio
  • Workshop
  • Garage
  • Barn

In this case, you will still be eligible for the home office deduction even if you frequently work at another location.

Can Remote Employees Claim the Home Office Deduction?

No. To claim the home office deduction, you must be self-employed. (Though, as mentioned above, you can claim this deduction if you are an employee as well as a business owner.)

Can I Claim the Home Office Deduction if I Rent My Home?

Yes. According to the IRS website:

“The home office deduction is available for homeowners and renters and applies to all types of homes.”

The IRS has also clarified that “all types of homes” includes:

  • Houses
  • Apartments
  • Condominiums
  • Mobile homes
  • Boats

What Expenses Can I Include in the Home Office Deduction?

The home office deduction allows you to deduct a wide variety of home-related expenses. These can be categorized as direct and indirect expenses.

Direct expenses are costs that apply directly to your home office. This includes maintenance, repairs, and upgrades for the room itself. For example, if you repainted your office, this would qualify as a direct expense.

Indirect expenses are expenses that apply to your whole home. For example, if you own your home, your mortgage payments would qualify as an indirect expense. If you are renting your home instead, your rental payments would qualify as an indirect expense. Other examples include:

  • Utilities
  • Real estate taxes
  • Depreciation
  • Insurance costs

However, you cannot deduct expenses that do not affect your home office at all. For example, you could not deduct the fee of a lawn care or landscaping service or the cost of painting a different room in your home. Neither of these actions has a direct or indirect impact on your home office.

How to Calculate the Home Office Deduction

If you are eligible for the home office deduction, there are two ways to calculate the deduction amount: the standard method and the simplified method.

1. Regular Method

To use this method, start by measuring the square footage of your home office. Then, divide that number by the total square footage of your home to determine what percentage of your home is taken up by your home office.

Next, list the indirect expenses for your home office, such as mortgage payments or utility bills. Add these expenses together and multiply that figure by the percentage from your first calculation to determine how much you can deduct.

For example, if your home office is 150 square feet and your home is 1,500 square feet, your home office occupies 10% of your home (150 ÷ 1,500). This means that you could deduct 10% of the total allowable expenses from your US tax bill.

Finally, decide which expenses qualify as direct expenses for your home office. This means expenses that were applied directly to the office itself, such as repainting the room or installing new lights. Unlike your indirect expenses, you can deduct 100% of any direct expenses from your taxes.

Once you’ve added the total amount of your direct expenses to the deductible percentage of your indirect expenses, you will know the full amount you can deduct using the home office deduction.

There is no limit to the amount that you can deduct using this method.

2. Simplified Method

As the name of this method suggests, it’s a much simpler calculation than the regular method.

Once again, start by measuring the square footage of your home office. This time, however, you will simply multiply that measurement by $5 per square foot.

For example, if you’ve converted a 100-square-foot spare room into your home office, you could deduct $500 (100 x $5). The maximum deduction you can claim using the simplified method is $1,500.

Which Method Should I Use to Calculate the Home Office Deduction?

The best method will depend on the details of your office and your home. There’s no one-size-fits-all solution. We recommend consulting a qualified tax professional who can help you determine which option will save you the most on your US tax bill.

Will Claiming the Home Office Deduction Trigger an Audit?

One of the reasons many expats choose not to claim the home office deduction is because they fear it will trigger an IRS audit. The good news is that this fear is largely unfounded. As long as you take the time to make sure you are truly eligible for the home office deduction and calculate it accurately, it’s unlikely that the IRS will take issue—even if you live abroad.

However, to reduce the chances of being audited, consider working with an expat tax professional who can give you reliable advice on whether your home office qualifies—and how much you can claim if it does. Not only will this give you peace of mind, but you may also discover that you’re able to deduct more than you originally thought.

Still Have Questions? We Have Answers!

We hope this guide has helped you understand how expats can take advantage of the IRS home office deduction. If you still have questions, we’d be happy to answer them. In fact, we can even prepare and file your expat taxes on your behalf.

At Greenback Expat Tax Services, we’ve spent years helping expats around the world manage their US tax obligations. Just reach out, and we can help you too.

Get started on your expat tax return.

Confused about when you need to file? We can help.

When you live in the US, tax day is simple: April 15th! When you move abroad, it’s not so straightforward! Learn about all the expat deadlines and extensions you need to know to file.

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