If you are wondering whether you can deduct your rent on your taxes, the short answer is yes. However, this depends on if you live in one of the 22 states that currently allow it. Before you try to deduct rent from income tax, we have some things you should review.
Can You Deduct Rent From Federal Income Taxes?
While the federal government does not allow taxpayers to deduct rental payments from federal income taxes, homeowners who do not claim the standard deduction could get a tax deduction from interest paid on a mortgage, property taxes, improvement costs, and capital gains. You first have to weigh the advantages and disadvantages of the standard deduction. By contrast, some items in the tax code allow renters to get tax deductions for housing, but those are structured around income and poverty levels.
Renters Can Utilize the Home Office Deduction
The closest the federal tax code gets to a residential rent deduction is the home office deduction. If you own your own business, work as a contractor, or are otherwise self-employed, you can deduct a portion of your home from your taxes as a business expense. This deduction is limited to the square footage used exclusively for business purposes. For example, if you have a dedicated office, you can deduct the square footage of that office. However, if you work from the kitchen table, you cannot claim any amount of deduction since that is considered a multipurpose space.
What are the Benefits of Claiming a Rent Deduction on Your Taxes?
Claiming a rent deduction on your tax return can have a tangible benefit. Doing so can reduce the tax bill you pay annually and lower your taxable income significantly. Not only is this ideal for employed people, but self-employed individuals can also reap the benefit of tax deductions associated depending on the state that they live in.
This is because tax deductions work by taking some of the money you would usually pay tax on and reducing it from your tax bill. This results in a lower taxable income, meaning your tax liability will subsequently be reduced. The reason rent deduction is particularly beneficial for self-employed individuals is their subjection to higher tax rates if they don’t take advantage of available deductions. Ultimately, these tax benefits can act as financial relief for anyone looking to save money on their taxes.
How is Home Office Rent Deduction Calculated?
The home office deduction is a business deduction that can be taken for costs associated with using a home office. Calculating the home office deduction is based on the number of square feet in the home office dedicated to running your business. Generally, you will be allowed to deduct a portion of your home’s mortgage interest, insurance, and other related items in proportion to the size of your home office compared to the total area of your home.
An important factor to consider when taking this deduction is that any space used for personal and business use will only qualify if you separate them completely and have distinct home offices. It is also essential to ensure that you can prove which portion of your home expenses should be deducted in regard to the home office, so make sure you document any applicable expenses carefully. More information about how you can deduct home offie rent can be found on IRS.gov.
Keep in mind remote workers cannot claim this deduction. It is only available to self-employed individuals.
What Home Office Expenses are Tax Deductible?
Working from home is becoming increasingly popular for individuals and businesses, and it may be possible to save on taxes through home office deductions. Before claiming home office expenses as a tax deduction, it is important to understand what the home office deduction covers and how it works. Generally, home office deductions are available to individuals running a business from home or using part of their home as office space for business activities.
It includes deductible home office expenses or itemized deductions, including electricity, repairs, mortgage interest, rental costs, homeowner’s insurance premiums, property taxes, and depreciation. Additionally, qualifying home expenses with respect to state and local income taxes can also be deducted in some cases. It is, therefore, essential to do your research thoroughly when considering home office expenses that are eligible for tax deductions.
What States Allow Renters to Deduct Rent on Income Taxes?
As we mentioned above, there are 22 states that allow renters to deduct a part of their rent from state income taxes. Some of these states include:
Usually, the purpose of this deduction is to prevent effective double taxation. Most landlords pay property taxes on the homes and units that they own. Most, if not all, pass those costs along to their tenants as part of the rent. When property taxes go up, rent goes up to cover that cost.
In this way, renters pay property taxes to their local communities indirectly. As a result, some states allow tax deductions for rent to defray the property taxes that renters have already effectively paid.
In most cases, a state will require that:
- You are a resident and taxpayer of the state.
- The apartment is your primary residence.
- Your name is on the lease, and you are paying rent.
Sometimes, a state will require your landlord to pay property taxes in your local community. From there, specifics vary widely, and you will need to review your specific state’s tax codes.
Other Ways States Allow Rent to be Deducted on Income Tax
Other states use this deduction to help lower-income residents. Those states structure their rent deductions around income levels, allowing you to claim a deduction if you rent and have an income lower than a pre-determined limit.
- In some states, the credit is restricted to taxpayers based on age or disability status. Essentially, the state wants to ease costs for disadvantaged taxpayers.
- In other states, the tax deduction is based on income and rental payments. For example, one common rule is for states to allow renters to deduct up to $3,000 in rent they have paid over the year, if they earned up to a certain income threshold.
- Some states give a fixed credit to some renters, again typically defined by income threshold. In those states, the tax credit tends to be a negligible amount, often not more than $75 in total.
Which is Better Buying or Renting?
Should you rent or buy in your location? This is about far more than just personal preferences. In today’s crazy real estate market, it has become an essential financial question for any household. Whether you are looking to reduce your tax liability or buy a new home, a financial advisor can help you put a financial plan into action for your needs.
As a business owner, you cannot deduct residential rent payments from your federal income taxes. But depending on where you live, you can deduct a portion of rent from your state income taxes. You can also deduct your home office space on your taxes so long as it’s not a multipurpose space.
As can be expected, laws are subject to change each year. At the time of this writing, 22 states offer a renter’s tax credit. If you’re wondering if your state allows for rent to be deducted on your taxes, make sure you look up the rules in your state before filing your taxes.
If you have questions about deducting rent from taxes, home office deductions or other business deduction questions, you should strongly consider working with a tax professional. They can not only answer your questions in depth and explain the ins and outs of taxes in your state, but they can set you up with a tax plan to make sure you’re making the most of your deductions and available credits.