When the IRS has a new deal – an easier way of calculating your tax deduction – be careful about your choice. While certain methods may be quicker, they may also be more costly. To make the right decision about which methods to use, consider the after-tax effect.
For example, as of January 2013, you may use a new optional method for determining your home office deduction, instead of allocating and proving your actual expenses.
The formula for the new method is simple: $5 x the sq. ft. in your home office (limited to 300 sq. ft.) So, if you had 180 sq. ft. in your home office, your deduction would be $900.
On the other hand, if you consider your actual expenses – such as mortgage interests, taxes, insurances, utilities, etc. – you have to remember a very important issue. Because you likely already qualify to deduct mortgage interest and property taxes as itemized deductions, you won’t realize a full tax benefit for these expenses allocated to the home office.
So again, you cannot compare the actual expenses with the new IRS method, unless you look at the after-tax consequences.
There are many instances like this in the tax law that are costly if not handled correctly. Your tax accountant should be able to organize all of your information in a way that these determinations can be made.