The IRS Home Office Deduction for US Expats – What You Need to Know
Allows American expats and Digital Nomads who work from home to deduct the legitimate expenses related to their work space when they file their US tax return.
All Americans are required to file a US federal tax return, reporting their worldwide income, wherever in the world they may be, if they earn a total of over $10,000, or just $400 of self-employment income.
While US tax treaties don’t prevent expats from paying US taxes from abroad, when expats file they can claim one or more IRS exemptions that achieve this, such as the Foreign Earned Income Exclusion, or, for expats who pay foreign taxes, the Foreign Tax Credit.
Expats with foreign bank or investment accounts may also have to file a Foreign Bank Account Report (FBAR).
The IRS Home Office Deduction for expats
Because expats are required to file a US federal tax return, the same if they lived in the States, they can also claim most of the same deductions, should they need to.
I say ‘should they need to’ because the majority of expats, once they have claimed the exemptions for expats mentioned above, won’t owe any US tax anyway.
Expats who work from home and who still owe some US tax though have the opportunity to claim the IRS Home Office Deduction.
There is a caveat though, in that since the recent Tax Reform, only expats who are self-employed, rather than employed, can claim the Home Office Deduction.
“If you use part of your home for business, you may be able to deduct expenses for the business use of your home. The home office deduction is available for homeowners and renters, and applies to all types of homes.”
– the IRS
This is because the Tax Reform removed the ability to claim miscellaneous itemized deductions on Schedule A of form 1040, raising the Standard Deduction to compensate. Self-employed expats can still claim the IRS Home Office Deduction on Schedule C though.
How to claim the IRS Home Office Deduction for expats
Firstly, to claim the Home Office Deduction, the space where an expat works at home must be regularly and exclusively used for work, and must be their principle place of business (rather than an auxiliary or secondary work space).
Then, assuming that they qualify based on the above criteria, there are two ways that self-employed expats can calculated how much they claim under the IRS Home Office Deduction.
The first method is called the Simplified Method, and it is calculated as a $5 deduction per square foot of the space utilized for the business, with a maximum of 300 square feet, or a maximum $1,500 deduction.
The alternative method is called the Regular method, and it involves calculating what proportion of the floor area of your home the work space is in feet, then using this figure to deduct the correct proportion of home expenses such as real estate taxes, mortgage interest, insurance and utilities that apply to the entire home, as well as a proportion of the depreciation of the home, if it is owned (rather than rented).
Any direct business expenses relating to the work space, such as alterations or repairs, can be claimed too.
In terms of which method is best, we recommend doing both calculations to discover which gives a higher sum and so is more beneficial.
The Home Office Deduction can be claimed whether the home is owned or rented.
Expats who are behind with their US tax filing can catch up while claiming the available IRS exemptions and without facing penalties under an IRS amnesty program known as the Streamlined Procedure.
Since FATCA (the 2010 Foreign Account Tax Compliance Act), the IRS has had the ability to access expats finances globally, and we strongly recommend that expats who have any questions regarding filing US taxes from abroad make contact with a US expats tax specialist at their earliest opportunity.