If you're self-employed, you may be able to write off rental deposit insurance through the home office deduction.
- Annuity insurance may be tax deductible if you use part of your home for business and work for yourself.
- You can only claim a deduction if you use the space exclusively and regularly for work purposes.
- People who receive a W-2 or do not work from home do not qualify for the deduction.
- Check out Personal Finance Insider's tips for the best tax software.
As more people have worked from home in recent years, questions often arise about what work-related expenses are deductible on your tax return. You may be wondering if renters insurance is one of them.
While it is not deductible for most taxpayers, if you are self-employed and work from home, you may be able to claim a deduction for a portion of what you paid for renters insurance.
Is rental deposit insurance tax deductible?
Homeowner's insurance is generally not tax deductible. After the passage of the Tax Cuts and Jobs Act in 2017, W-2 employees could no longer deduct labor costs on their federal tax returns. Business owners can, however, qualify for tax deductions on renters insurance, says Sarah York, staff writer and in-house tax expert at Keeper Tax, a startup focused on helping freelancers and gig workers maximize their tax savings.
When is rental deposit insurance tax deductible?
As with homeowners insurance, you can deduct renters insurance if you are self-employed and use part of your rental unit as a home office. However, your home office must be used regularly and exclusively for business purposes IRS. A tax-deductible home office could include a room in your unit that you have specifically designated for business activities.
When is rental deposit insurance not tax deductible?
If you receive a W-2 from an employer, you can't use it to deduct retirement costs, even if you work from home and have a home office, York says.
Even if you are self-employed, you may not be able to deduct rental deposit insurance. If your home office is used for other than business purposes – for example, as a guest room, it wouldn't meet IRS requirements and therefore wouldn't qualify for deductions, says Audrey Blanke, certified financial planner with Atlatl Advisers, an asset -management firm in Madison, Wisconsin.
Here's how to calculate your renter's insurance deduction
There are two ways to claim renters insurance deductions for your home office: the simplified method and the regular method.
The simplified method is based on the square footage of your office. It allows you to claim $5 per square foot up to 300 square feet or 1.Deduct $500. If you didn't use the space for a home office throughout the year, that amount should be prorated.
"If you're a business owner with a traditional office that you rent out in addition to a small workspace in your home, you and your tax advisor need to consider the time spent in each space and the types of tasks performed," Blanke says.
The regular method is a little more complicated. It has two components: direct expenses and indirect expenses. Direct expenses are 100% deductible and include things like office supplies, the cost of a phone line or the cost of furnishings. Indirect expenses don't relate solely to your business, including things like your mortgage, property taxes, and renters insurance.
To use the standard method, divide the square footage of your home office by the square footage of your entire home. This gives you the base percentage of your home office that you can claim. Assuming your base percentage is 5%, you are allowed to claim a 5% discount on all office-related expenses, including tenant insurance.
Because the simplified method is easier to use, it may be a better option for people who want to save time and forgo the hassle of keeping track of all business expenses. It also minimizes the risk of an IRS audit, York says.
Here's how to claim the renter's insurance deduction
After you determine your deduction using the simplified method, you can claim this amount on Schedule C on line 30. If you use the standard method, you'll need to fill out Form 8829, Business Use of Your Home. Include your renters insurance on line 18 under "indirect expenses". After you fill out your form, enter the entire home office deduction amount on your Schedule C.
The home office deduction may result in increased scrutiny from the IRS. So be sure to include your actual business expenses. Remember that your home office must be used regularly and exclusively for business operations. In addition, office-related expenses must be used exclusively for your business to claim this deduction. York suggests using the simplified method if you have concerns about IRS audits.
"Don't be too aggressive," York says. "As tempting as it is to write off major home expenses, if you can't defend it when the IRS comes knocking, you'll face additional taxes and penalties."