IRS Form 8829 vs simplified method for home office deduction

Over @ Bogleheads we came across the following discussion....

Form 8829 vs simplified method for home office deduction

by dhc » Sat Jan 31, 2015 5:00 pm

We bought a house this year and one of us has a business run out of our home. We qualify for the deduction; the question is, do we use form 8829 or the simplified method?

For the partial year during which we owned the home and had an exclusive space for the business, simplified method comes out to $165, while form 8829 comes out to $365 including $100 in depreciation. We're in the 15% tax bracket. I know depreciation has to be recaptured later, potentially at a higher tax bracket if we sell the home in a year with higher income, so if the difference were only the depreciation amount, I'd probably opt for the simplified method. Given the additional $100 in deduction, though, am I missing any reason we wouldn't want to use form 8829?

Thanks!

dhc

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Re: Form 8829 vs simplified method for home office deduction

by JDDS » Sun Feb 01, 2015 3:44 pm

I only understand this issue a little bit. If you only had a partial year this time, I'm guessing the gap between the methods will be larger in future years? It sounds like you can swap methods each year, but the last bullet on this page says the calculation can be dependent on the prior years method?? http://www.irs.gov/Businesses/Small-Bus ... -Deduction

Sorry I don't have more info to offer.

JDDS

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Re: Form 8829 vs simplified method for home office deduction

by dhc » Sun Feb 01, 2015 4:14 pm

Yes, I expect the gap will be larger in future years.

As for depreciation calculation, my reading of that is that it's basically saying using the simplified method doesn't extend depreciation timelines or anything like that; it just makes depreciation not applicable for the year in which you use it.

Thanks for the reply - if anything, the larger gap in the future likely makes using form 8829 make that much more sense.

dhc

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Re: Form 8829 vs simplified method for home office deduction

by HueyLD » Sun Feb 01, 2015 5:38 pm

If you can only come up with $165 of simplified deduction, you only have 33 SFT of qualified space and the maxmum allowable deduction under the simplified method is $5 x 300 = $1,500.

Since your are allowed an additional $200 of deduction using the standard method via form 8829, you save $31 in payroll taxes plus $30 in federal income tax plus another amount in state income tax. Even though the dollars are small, they represent a relative large percentage of tax benefits. And as your tax brackets go up, the benefit will also go up accordingly.

As you already understand that depreciation will be recaptured in the future when the house is sold, but deductions today usual provide more benefits than some future recaptures. Moreover, as your AGI increases over the years, you will find it beneficial to be able to split home mortgage and property tax deduction between Sch. A and Sch. C because your itemized deductions may be limited by income or AMT in the future.

Time for taxes: Higher standard deduction, other breaks for older taxpayers

Carol Feldman for the SouthEast Missourian writes:   You've downsized to an apartment, the kids are long gone and you're no longer eligible for some of the deductions and exemptions that had helped you lower your tax bill.

But for those 65 years or older, there are other tax breaks that might benefit you come tax time.

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People 65 and over also should consider whether it's more beneficial for them to claim the standard deduction or to itemize.

The standard deduction is higher for seniors -- $7,750 if your filing status is single, $14,800 if you're married filing jointly and you and your spouse are both at least 65. That compares to $6,200 for single filers under 65 and $12,400 for married taxpayers under 65 who are filing jointly.

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But it's important to do the math -- or let your tax preparer or tax software do it for you -- to see whether it still makes sense to itemize even with the higher standard deduction.  [ snip ].  The article continues @ the SouthEast Missourian, click here to continue reading....