How to Qualify for the Home-Office Tax Deduction

Americans are increasingly working at home, but many fail to claim tax deductions for home offices; they fear it will make them a target for an audit or that it will cost them when they sell their home.

That could be a mistake. The deduction can save you a lot of money if you're willing to plan carefully and keep the right records. If you're single and self-employed, with a taxable income of $60,000, you're in the 25% tax bracket. With the self-employment tax at 15.3% (for Social Security) and typical state income taxes of 5% to 6%, your tax rate is in the 45% range.

"Every dollar you can legitimately deduct saves you 45 cents," says Jeff Levine, a CPA with Alkon & Levine in Newton, Mass.

"If you can take the deduction, you should," Levine adds. "It's not really likely to provoke an audit, and the potential downside when you sell your home isn't as bad as it was. Don't do it if you don't qualify, because the penalties -- which often amount to 20% of the understated tax, plus interest -- are a killer. But if you do qualify, it's worth it."

With that in mind, our two-part series explores the ins and outs of the home-office deduction. This first part answers these questions: How do you know if you and your office qualify? How can I claim the deduction? Part Two will answer three more questions: What do I need to back up my claim? Is the deduction a red flag for an audit? And what are the downsides of taking the deduction?

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