This title may be a little bit dramatic for the topic at hand. This will not be a post about karma or wrongdoing catching up to you. But it is a matter of a little bit of effort paying off, in this case in the form of a lower tax bill.
(Disclaimer: I am not a tax attorney or a CPA. Please consult your tax professional for tax or legal advice as this does not constitute valid tax advice in any way, shape or form. I can only share my PERSONAL experience in how I decide to do my taxes.)
I have been dedicating a part of my home as a home office for the past 5 years or so. The bulk of my real estate work is done from home. Believe it or not, a real estate agent does not simply open doors and collect checks, at least not the good ones. We negotiate on the phones, we seek out homes for our buyers, we do market research to help our clients stay abreast of prices, we respond to emails, draft offers, sign contract, network, schedule appointments, and more. Because we are considered independent contractors, we are free to set our schedules and decide our work environments. Why would we drive to an office if we have the freedom to work where we want? No benefits, no rules. As such, the part of my house that I use for that work is considered my home office. Said home office allows me to have a tax deduction.
I am ashamed to say that I have been taking the easy way out. The IRS allows you to calculate the deduction amount in two ways. First you can do the simplified way which is to calculate the square footage of your office space and then take a $5/sq ft deduction of said space. My office being 11×14 means I was allowed $770 in deduction per year ($5*154 sq ft).
However, this year I dedicated additional time to my taxes and began exploring the more detailed calculation. This one is where you take your office square footage and calculate what percentage of your entire room that it represents. Then you can use that percentage to determine what percent of your household bills qualify for a deduction. By using that method, I was able to more than double my allowable home office deduction. Of course it requires that I determine which expenses are eligible and which are not. For example, I hired an electrician to improve/repair the lighting in there, but I also renovated a bathroom that’s right next to the office. The lights can be included but the renovations cannot because the IRS does not allow deductions for expenses that are cosmetic (rather than functional) and improve the value of the dwelling.
It was more time consuming and a bit tedious but worth the effort. Because, why would I pay more in taxes than I need to? We already know there’s a segment of the population that pays no taxes, some of them are millionaires. As much as I enjoy my social responsibility to my fellow citizens, mama didn’t raise a fool. It will also be easier next year, since I’ve invested the time needed to do the research this go around. I already know which bills will be included and I will start preparing my records in advance by downloading data from my service providers’ websites as soon as they become available. Sure, the new tax bill means that I will require a refresher to ensure that there aren’t significant changes, but I’m already ahead of the game and my tax bill is lower for it.
I may have started out with the simplified method, but I eventually put in the time, effort and patience to learn the more detailed option which allowed me to have a significantly higher tax deduction. Ultimately, this is the principle by which I live my life. Get informed/educated, invest time in the areas where you want to see results and not settle for taking the easy way out.
With that said, Happy Belated Tax Day! And congratulations on that unusual one-day extension you filthy procrastinators!