How to Claim the IRS Home Office Deduction While Living Abroad
- Work from Home Deductions for Digital Nomads & US Expats
- What Is the IRS Home Office Deduction?
- Can I Claim the Home Office Deduction While Living Abroad?
- Eligibility Requirements for the Home Office Deduction
- How to Calculate the Home Office Deduction: Regular Method vs. Simplified Method
- FAQs for the Home Office Deduction
- Still Have Questions About Your Home Office Deduction? We Have Answers!
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.
- Self-employed expats are often eligible to claim the IRS home office deduction.
- The home office deduction allows you to deduct certain expenses from your US tax bill.
- There are several requirements that self-employed expats must meet to qualify for this tax benefit.
Work from Home Deductions for Digital Nomads & US Expats
Self-employed citizens are generally eligible for a variety of tax breaks. This includes deductions for office supplies, software, and business insurance. Another important tax benefit is the home office deduction. As an American living and working overseas, this deduction could help you save big on your tax bill.
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)
- Maintenance costs
- Repair costs
- Upgrade costs
- Real estate taxes
- Insurance costs
Can I Claim the Home Office Deduction While Living Abroad?
Yes. Americans living overseas can claim the home office deduction if they are self-employed business owners. However, not every expat automatically qualifies for this tax benefit. You will still have to meet the same requirements as a taxpayer living in the US.
Eligibility Requirements 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.
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.
2. Exclusive Use
In order for an area to qualify as a home office, you must use it exclusively for that purpose. It won’t count if your “home office” is a kitchen table or a desk in the corner of your bedroom. The space must be dedicated to your work.
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 hasn’t given a clear definition yet. But we can reasonably assume that this means that if you only use your “home office” once in a blue moon, it won’t qualify. If you use your office consistently, even for only a few hours per day, it probably meets this standard.
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. It’s fine to pop down to a coffee shop or public park to work once in a while. But if you regularly work somewhere outside of your home, you will likely forfeit the home office deduction.
Note that there are two exceptions to this rule.
- If your profession requires you to work outside of your home (such as working as a plumber or general contractor), you can still claim the home office deduction if you have an office to perform “substantial administrative tasks.”
- If your office is in a free-standing structure separate from your house (such as a workshop or garage), you will still be eligible for the home office deduction even if you frequently work at another location.
How to Calculate the Home Office Deduction: Regular Method vs. Simplified Method
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.
If you plan on making significant upgrades or repairs to your home office, consider the tax implications before getting started. In some cases, it may be better to spread the costs out over several years to maximize your tax deductions.
FAQs for the Home Office Deduction
Can I Claim Both the Home Office Deduction and Foreign Housing Exclusion?
Yes. As a US citizen living overseas, you can claim both the home office deduction and Foreign Housing Exclusion as long as you are eligible for both. However, you can’t deduct the same expenses under both benefits. For example, if you perform repairs to your home office, you cannot include the cost of those repairs as part of both your home office deduction and Foreign Housing Exclusion.
Can Remote Employees Claim the Home Office Deduction?
No. To claim the home office deduction, you must be self-employed.
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:
- Mobile homes
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.
What Other Home Office Expenses Are Tax Deductible?
In addition to the home office deduction, you can also claim a variety of other business expenses as tax deductions. This may include:
- Business software
- Office supplies
- Shipping costs
- Business-related insurance premiums
To be deductible, these expenses must be strictly for business purposes. Maintain detailed records of these expenses to substantiate your claims if necessary, and consider consulting a tax professional to ensure you’re taking advantage of all eligible deductions.
Still Have Questions About Your Home Office Deduction? 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. If you’re ready to be matched with a Greenback accountant, click the get started button below. For general questions on expat taxes or working with Greenback, contact our Customer Champions.