One of the most widely rumored tax deductions is the idea that you can deduct half of the amount paid on rent from your income taxes. As with all things tax related, it’s a bit more complicated than that.
Some states do allow you to subtract a certain amount of paid rent from your state taxes. Massachusetts, for example, allows renters to deduct up to half their rent from the year but with a maximum of $3,000. The amount and ability to do this varies from state to state, so check your state’s income tax website first to ensure this is available in your area.
On the federal level, the news isn’t so good for those hoping to deduct their rent – It is not possible to deduct the rent from a primary residence on your federal income taxes if you do not own a business.
If you own a small business, then it is possible to deduct rent from your federal income taxes if you have a dedicated portion of your rental as office space. This is not a trick or some fancy manipulation—it’s simply part of the tax code. The deduction is just one of the many deductions made available to small business owners as a means to offset some of the additional costs of operating a business and to encourage small businesses.
To do this, first you need to dedicate a portion of your residence to your business. It cannot be some arbitrary corner of living room. The IRS requires that the area be clearly labeled and used only for the business.
Next you need to figure out what percentage of your home is being used for your business. First measure the square footage of your home office, then divide that by the total square footage of your home. For example, if your home office is 200 square feet and your apartment is 1000, then your calculations should end up with 20% of your home as used for the business. You’ll need to multiply by 100 to get the actual percentage, but keep it as decimal for the next step.
If you plan to do subtract your rent as a business expense, then you also need to keep an itemized list of what you spend to upkeep your apartment outside of rent. That means your security costs, office supplies and anything else used in your home office. You need to multiply the amount spent on those things by the percentage calculated earlier and that will give you how much you can deduct from your federal taxes.
So if you spent $3500 upkeep on your apartment and know that 20% of the apartment is used by your office, then you would be able to deduct $700 from your taxes.
To claim this deduction you first need to fill out IRS Schedule C- Profit or Loss from Business form to determine the annual gross income. Once you know the gross income of your business you claim your deduction on IRS Form 2289 – Expenses for Business Use of Your Home. Your deduction cannot exceed the gross income of your business.
While this is good news for small business owners, it’s likely very disappointing to everyone else who was hoping for one more deduction on their taxes. Don’t be too down, there are still plenty of other deductions that you can take. The Earned Income Credit, Childcare Credit, Adoptions Credit and Alternative Minimum Tax are all still present and available. Taxes and deductions are complicated, remember to consult a tax professional if you feel over your head.
Angie Picardo is a staff writer for NerdWallet. Her mission is to help consumers stay financially savvy and save money with Nerdwallet’s best cash rewards credit cards.