2018 Tax Changes by Form

Line 7 of the IRS Form 1040, U.S. Individual Income Tax Return, generally must include:

• all wages you receive;
• all tips that you did not report to your employer;
• dependent care benefits you received;
• employer-provided adoption benefits you received;
• excess elective deferrals;
• disability pensions you received before the minimum retirement age set by your employer;
• and certain scholarship and fellowship income you received.

There are exceptions to the above examples. For full rules, see IRS Publication 17.

If you’re an employee, your employer should have sent you a IRS Form W-2, Wage and Tax Statement.

You can find your total wages in box one (1) of your IRS Form W-2, Wage and Tax Statement.  You must separately add and report tip income you didn’t report to your employer.

For procedural information on reporting other forms of income under Line 7 of the IRS Form 1040, see IRS Form 1040 Instructions – [Line 7].

Most interest received by you or credited to your account that you can withdraw without penalty is income.

Taxable interest includes: interest on bank accounts, money market accounts, certificates of deposit, corporate bonds, and deposited insurance dividends. Taxable interest also includes interest income from Treasury bills, notes, and bonds.

Some interest received by you isn’t counted as income for tax purposes. Tax-exempt interest is commonly earned from qualifying municipal and state bonds, which are issued to finance public improvements.

Other less common sources of tax-exempt interest income include interest on insurance dividends left on deposit with the U.S. Department of Veteran Affairs, and interest redeemed from Series EE and Series I bonds issued after 1989 when used to pay for qualified higher educational expenses during the year. See IRS Publication 970 – Educational Savings Bond Program.

Each payor of interest should’ve sent you an IRS Form 1099-INT, Interest Income or IRS Form 1099-OID, Original Issue Discount, which will indicate your total taxable interest income.

If you earn more than $1,500 in interest income, you must fill in and attach an IRS Form Schedule B, Interest and Ordinary Dividends.

Dividends are a form of investment income a corporation may pay you if you own stock in that corporation. Dividends may additionally be received from ownership interest in a trust/estate, a partnership, or an S-corporation.

Dividends are usually paid in cash.

Dividends are taxed at either ordinary income rates or at lower long-term capital gains rate. Dividends taxed at ordinary income rates are called ordinary dividends. Dividends taxed at the lower long-term capital gains rate are called qualified dividends.

Qualified dividends are paid from stock held for more than a statutorily-mandated period. For more information, see Publication 550, Investment Income and Expenses.

If you own stock in a corporation which pays dividends over $10 annually, the corporation will send you an IRS Form 1099-DIV, Dividends and Distributions. This form should indicate whether the dividends are ordinary or qualified. See IRS Form1040 Instructions.

If you earn more than $1,500 in dividend income, you must fill in and attach an IRS Form Schedule B, Interest and Ordinary Dividends. Not all distributions are taxable. Some distributions are a return of your cost or basis. You won’t be taxed on those distributions until you recover your cost. For more information, see IRS Publication 550, Investment Income and Expenses.

If you received a refund, credit, or offset from either state or local income taxes, you must include that amount as income if you deducted the tax in an earlier year.

Exception: You won’t be taxed on the refund, credit, or offset if you didn’t itemize deductions or elected to deduct state and local general sales taxes instead of state and local income taxes. For more information, see IRS Publication 525 or IRS Form 1040 Instructions – Line 10.

The government agency which provided you with the benefit should have provided you with an IRS Form 1099-G, Certain Government Payments, with Box 2 listing the amount of the benefit.

The spouse receiving the alimony must include the amount received in income.

Note: To qualify as alimony, payments must meet certain requirements.

If you use part of your home exclusively and regularly for conducting business, you may be able to deduct expenses such as mortgage interest, insurance, utilities, repairs, and depreciation for that area. You need to figure out the part of your home, utilities, repairs, and depreciation that you use only for your business activities. There are two methods to help you determine the part of your home used only for your business activities.

Regular Method: You compute the business use of home deduction by dividing expenses of operating the home between personal and business use. You may deduct direct business expenses in full, and may allocate the indirect total expenses of the home to the percentage of the home floor space used for business.

A qualified daycare provider who doesn’t use his or her home exclusively for business purposes, however, must figure the percentage based on the amount of time the applicable portion of the home is used for business. Self-employed taxpayers filing IRS Form 1040, Schedule C, Profit or Loss From Business (Sole Proprietorship), first compute this deduction on IRS Form 8829, Expenses for Business Use of Your Home.

Simplified Option: You may find the simplified option less burdensome than the regular method. If you meet the requirements, you can use a prescribed rate of $5 per square foot of the portion of the home used for business (up to a maximum of 300 square feet) to compute the business use of home deduction. Under this safe harbor method, depreciation is treated as zero and you claim the deduction directly on IRS Form 1040, Schedule C. Instead of using IRS Form 8829, you indicate your election to use the safe harbor option by making two entries directly on the IRS Form 1040, Schedule C for the square footage of the home and the square footage of the office.

This simplified option doesn’t change the criteria for who may claim a home office deduction. It simply makes the calculation and recordkeeping requirements of the allowable deduction easier.

You have a capital gain, if the amount received from the sale or exchange of a capital asset exceeds (is more than) your adjusted basis in the capital asset.

You have a capital loss, if the amount received from the sale or exchange of a capital asset is less than your adjusted basis in the capital asset.

Capital assets include almost everything owned by you for either personal or investment purposes. Examples include your home, personal-use items like household furnishings, and stocks and bonds held as investments. Your adjusted basis is generally the total cost you paid for the asset plus any improvement costs and minus any depreciation deductions taken.

Gains from the sale or exchange of capital assets are taxed at different rates depending on the length of time you had the assets Generally:

• Gains from the sale or exchange of capital assets held for more than one year are taxed at favorable capital gains rates.
• Gains from the sale or exchange of capital assets held for not more than one year are taxed at ordinary income rates.

To calculate short-term and long-term capital gain or loss, refer to IRS Form 8949, Sales and other Dispositions of Capital Assets and IRS Schedule D, Capital Gains and Losses.

Note: The law places a limit on the deduction for capital loss and allows you to carry the unused loss forward to later years. For more details, see capital gains and losses instructions.

Line 14 on the IRS Form 1040 tax return is used to report gains or losses from the sale of property used in a trade or business that you didn’t report elsewhere on your return or other schedules.

Examples of other gains or losses include:

• Gain or loss resulting from the sale or exchange of property used in the trade or business;
• Certain involuntary conversions of property used in the trade or business;
• Certain disposition of noncapital assets;
• Disposition of capital assets not reported on IRS Form Schedule D, Capital Gains and Losses;
• Dispositions of certain depreciable business property (IRC § 167 or § 179 property);
• Certain computation of recapture amounts (under IRC §§ 179 and 280F(b)(2)); and
• The gain or loss from deemed sales of securities or commodities with a mark-to-market election.

If you have a net gain or loss from these types of sales, report them on IRS Form 4797, Sales of Business Property, and report the ordinary gain or loss from these types of sales on IRS Form 1040, Line 14.

If you receive IRA distributions, you may have fully or partially taxable income depending on the type of IRA and whether your contributions to the IRA were in before-tax or after-tax dollars. IRA distributions include distributions from traditional IRAs, Roth IRAs, Savings Incentive Match Plan for Employees (SIMPLE) IRAs and Simplified Employee Pension (SEP) IRAs.

There are two basic types of IRAs:

• Traditional IRA; and
• Roth IRA.

The taxation differs for these two types of IRAs.

• Traditional IRA contributions may be tax-deductible for the year you make the contribution; withdrawals in retirement of before-tax contributions and earnings are taxed at ordinary income tax rates.
• Roth IRA contributions are made with after-tax dollars; withdrawals in retirement of contributions and earnings are generally tax-free. However, contributions are subject to income limitations.

For more information, see IRS Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs).

Pension and annuity payments include amounts received from 401(k), 403(b), and governmental 457(b) plans.

If you have a pension or annuity, then you are fully taxed on the amounts received which exceed your cost in the pension or annuity. Your cost is your net investment in the plan as of the annuity starting date (or the date of the distribution, if earlier).

If you haven’t recovered your cost, then depending on your circumstance, you’ll be partially taxed or not taxed at all on the amounts received. For full rules, see IRS Publication 575: Pension and Annuity Income; 1040 Instructions: Line 16.

Certain types of pensions and annuities aren’t subject to taxation upon distribution. For instance, qualified distributions received under a Roth 401(k) plan aren’t taxable.

If you received a payment from a pension or annuity, then you should’ve received an IRS Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., with Box 1 indicating the total amount of your pension/annuity payments before income tax or other deductions were withheld.

Unemployment compensation or insurance benefits that you receive from the United States or a state government is income in the year you receive it.

If you receive social security benefits, you may have to pay taxes on part of those benefits. Social security benefits include monthly retirement, survivor and disability benefits. They don’t include Supplemental Security Income (SSI) payments, which are not taxable.

The net amount of social security benefits that you received during the year is reported in Box 5 of IRS Form SSA-1099, Social Security Benefit Statement. You report that amount on your IRS Form 1040, line 20a. The taxable portion of those benefits, if any, is reported on line 20b.

To determine whether you must pay taxes on your benefits, compare the following amounts:

  1. 50 percent of your social security benefits, plus modified gross adjusted income (including tax-exempt income), against

 2. The “base amount” associated with your filing status:

• $25,000 for single, head of household, qualifying widow(er), and married filing separately and lived apart from your spouse for all the tax year; or
• $32,000 for married filing jointly; or
• $0 for married filing separately and lived with your spouse at any time during the tax year.
• If the base amount equals or is greater than the amount in (1), then you don’t have to pay taxes on any of the benefits. But if the base amount is less than the amount in (1), then generally up to 50 percent (or up to 85 percent under certain situations) of your benefits are taxable.

Use this interactive online test or Worksheet 1 on Publication 915, Social Security and Equivalent Railroad Retirement Benefits to find out what portion of your benefits are taxable.

Line 21 is used to report taxable income that you didn’t report elsewhere on your return or other schedules. Examples of Other Income include:

• Most prizes and awards;
• Gambling winnings, including lotteries and raffles;
• Jury duty pay;
• Hobby income;
• Cancelled debts;
• Taxable distributions from a Coverdell education savings account or a qualified tuition program;
• Health Savings Account (HSA) distributions not used to pay or reimburse you for qualified medical expenses;
• Reimbursements for items erroneously deducted in an earlier year (such as medical expenses and real estate taxes);
• Alaska Permanent Fund dividends;
• Net operating loss (NOL) deduction carried over from a previous year; and
• Taxable portions of disaster relief payments.

You shouldn’t report the following as Other Income:

• Self-employment income; or
• Non-taxable income (child support, life insurance proceeds, gifts).

If you’re an eligible educator, you can deduct up to $250 ($500 if you’re filing a married filing joint tax return and both you and your spouse are eligible educators, but not more than $250 each) of unreimbursed trade or business expenses.

Qualified expenses are amounts you paid or incurred for participation in professional development courses, books, supplies, computer equipment (including related software and services), other equipment, and supplementary materials that you use in the classroom. For courses in health or physical education, the expenses for supplies must be for athletic supplies.

You’re an eligible educator, if you’re a kindergarten through grade 12 teacher, instructor, counselor, principal or aide for at least 900 hours during a school year in a school that provides elementary or secondary education as determined under state law.

An HSA may receive contributions from an eligible individual or any other person, including an employer or a family member, on behalf of an eligible individual.

Contributions, other than employer contributions, are deductible on your return whether or not you itemize deductions. Employer contributions aren’t included in income. Distributions from an HSA that are used to pay qualified medical expenses aren’t taxed.

The amount you or any other person can contribute to your HSA depends on the type of high deductible health plan (HDHP) coverage you have, your age, the date you become an eligible individual, and the date you cease to be an eligible individual.

For 2017, if you have self-only HDHP coverage, you can contribute up to $3,400. If you have family HDHP coverage, you can contribute up to $6,750.

For 2018, if you have self-only HDHP coverage, you can contribute up to $3,450. If you have family HDHP coverage, you can contribute up to $6,900.

For tax years beginning before 2018, if you moved due to a change in your job or business location, or because you started a new job or business, you could deduct your reasonable unreimbursed moving expenses but not any expenses for meals. You could deduct your moving expenses, if you met all three of the following requirements:

• Your move closely relates to the start of work;
• You meet the distance test; and
• You meet the time test.

If you’re a member of the Armed Forces who is on active duty and moved because of a military order, and incident to a permanent change of station, you didn’t need to satisfy the distance and time tests.

If you were working abroad or are a survivor of a decedent who was working abroad and, upon permanent retirement (or in the case of a survivor, death of the taxpayer working abroad), you move to the United States or one of its possessions, you don’t have to meet the time test.

For a detailed description of each of these requirements, see IRS Publication 521, Moving Expenses.

The spouse paying the alimony gets a deduction for the amount paid.

Note: To qualify as alimony, payments must meet certain requirements. 

For 2017, you can contribute to a traditional IRA up to:

• $5,500, or
• $6,500 if you were age 50 or older by the end of 2017.

However, you may not be able to deduct all your contributions depending on your modified adjusted gross income and whether you or your spouse were covered by an employer retirement plan.

For a more detailed description of the requirements to deduct IRA contributions, see IRS Publication 590-A, Contributions to Individual Retirement Arrangements.

If your modified adjusted gross income (MAGI) is less than $80,000 ($165,000 if filing a joint tax return), you can take a deduction for interest you paid during the year on a qualified student loan (also known as an education loan).

The loan proceeds must be used to pay for qualified education expenses for yourself, spouse, or dependent at an eligible education institution. The deduction is limited to $2,500 and will be phased out once your MAGI exceeds $65,000 (or $135,000 if filing a joint tax return).

For a more detailed explanation of the requirements to take this deduction, see IRS Publication 970, Tax Benefits for Education.

For tax year 2017, you could deduct qualified education expenses paid during the year for yourself, your spouse or your dependent. Qualified education expenses were amounts paid for tuition and fees required for the student’s enrollment or attendance at an eligible educational institution. Required fees included amounts for books, supplies, and equipment used in a course of study.

Qualified education expenses include nonacademic fees, such as student activity fees, athletic fees, or other expenses unrelated to the academic course of instruction, only if the fee must be paid to the institution as a condition of enrollment or attendance.

The deduction wasn’t available if your filing status was married filing separately or if another person could claim an exemption for you as a dependent on his or her tax return. The qualified expenses must have been paid for higher education and the deduction was limited to $4,000.

You could deduct as an itemized deduction any interest paid on a mortgage to buy, build, or improve your principal home and a second home, if the debt totaled $1 million or less ($500,000 or less if you were married, but filed a separate tax return).

You were also allowed to deduct interest paid on home equity debt (not used to buy, build, or improve a first or second home) if the debt totaled $100,000 or less ($50,000 or less if you were married, but filed a separate tax return) and totaled no more than the fair market value of your home (reduced by the debt). Debt is the amount you owed on the home.

Previously, you were only allowed to deduct cash contributions to qualifying organizations up to 50 percent of your AGI. This 50 percent limit on cash contributions was limited to 30 percent for certain private foundations.

The deduction limit for contributions of appreciated property was limited to 30 percent of AGI. In addition, you could carry-forward any amounts that exceeded the AGI thresholds for five-years (on future tax returns).

You could claim an exemption for yourself, your spouse, and for each person you claim as a dependent on your tax return. In tax year 2017, you could claim $4,050 for each exemption. However, your exemptions were reduced if your adjusted gross income (AGI) was above a certain amount:

• $156,900 for married individuals filing separate tax returns;
• $261,500 for single individuals;
• $287,650 for heads of household; and
• $313,800 for married individuals filing joint tax returns or qualifying widow(er)s.

For 2017, there are seven federal income tax rates. The 2017 tax rates are 10 percent, 15 percent, 25 percent, 28 percent, 33 percent, 35 percent, and 39.6 percent.

The amount of tax you owe depends on your income level and filing status.

You may be able to claim the child and dependent care credit if you paid expenses for the care of a qualifying individual to enable you (and your spouse, if filing a joint tax return) to work or actively look for work.

You may not take this credit if your filing status is married filing separately.

The total expenses that you may use to calculate the credit may not be more than $3,000 (for one qualifying individual) or $6,000 (for two or more qualifying individuals).

Expenses paid for the care of a qualifying individual are eligible expenses if the primary reason for paying the expense is to assure the individual’s well-being and protection.

If you received dependent care benefits that you exclude or deduct from your income, you must subtract the amount of those benefits from the dollar limit that applies to you.

The amount of the credit is a percentage of the amount of work-related expenses you paid to a care provider for the care of a qualifying individual.

The percentage depends on your adjusted gross income (AGI). Your AGI is your gross income less certain adjustments to your income and can be found on your tax return.

For more information on the requirements for and calculation of this credit see IRS Publication 503, Child and Dependent Care Expenses.

If you, your spouse, or your dependent are enrolled in a higher education institution, you can take one (not both) of the following education credits to help cover the cost of qualified education expenses:

• Lifetime Learning Credit: A nonrefundable credit for 20 percent of the first $10,000 of qualified education expenses or a maximum of $2,000 per return.

The credit is only available if your modified adjusted gross income (MAGI) is $66,000 or less or $132,000 or less if you are married and filing a joint tax return. The credit begins to phase out when your MAGI reaches $56,000 (or $112,000 for married taxpayers filing a joint tax return).

• American Opportunity Credit: A credit for qualified education expenses paid for an eligible student pursuing a degree and in the first four years of higher education. You can get a maximum annual credit of $2,500 per eligible student.

The amount of the credit is 100 percent of the first $2,000 of qualified education
expenses you paid for each eligible student and 25 percent of the next $2,000 of qualified education expenses you paid for that student. But, if the credit pays your tax down to zero, you can have 40 percent of the remaining amount of the credit (up to $1,000) refunded to you. The credit begins to phase out once your MAGI reaches $80,000 ($160,000 for married taxpayers filing a joint tax return).

You can claim either credit for qualified education expenses paid with the proceeds of a loan. Neither credit is available if you file married filing separately. For more information on the requirements to take each credit and calculations of the amount of each credit, see IRS Publication 970, Tax Benefits for Education.

You may be able to take a tax credit for making eligible contributions to your IRA or employer-sponsored retirement plan. To be eligible to take the credit, you must satisfy the following requirements:

• Age 18 or older;
• Not a full-time student; and
• Not claimed as a dependent on another person’s return.

The amount of the credit is 50 percent, 20 percent or 10 percent of your retirement plan or IRA contributions up to $2,000 ($4,000 if married filing a joint tax return), depending on your adjusted gross income (AGI). More information about AGI limitations and applicable percentages can be found on IRS Form 8880, Credit for Qualified Retirement Savings Contributions.

Previously, beneficiaries of ABLE accounts couldn’t claim the saver’s credit for contributions made to the ABLE account.

Child tax credit allowed you to reduce your federal income tax by up to $1,000 for each qualifying child under the age of 17.

A qualifying child for this credit is someone who meets the qualifying criteria of six tests: age, relationship, support, dependent, citizenship, and residence.

The credit is limited if your modified adjusted gross income (MAGI) is above a certain amount. The amount at which this phase-out begins varies depending on your filing status. In 2017, the phaseouts began if your MAGI was at the following levels:

• $110,000 for married taxpayers filing a joint tax return;
• $55,000 for married taxpayers filing a separate tax return;
• $75,000 for all other taxpayers.

In addition, the child tax credit is generally limited by the amount of the income tax you owe as well as any alternative minimum tax you owe.

You may be able to claim an additional child tax credit, if the amount of your child tax credit is greater than the amount of income tax you owe.

The ISRP in the Affordable Care Act requires you, your spouse, and your dependents to have one of the following:

• Qualifying health care coverage for each month of the year,
• Qualify for a health coverage exemption, or
• Make an Individual Shared Responsibility Payment when filing your federal income tax return.

In general, the annual payment amount is the greater of a percentage of your household income or a flat dollar amount, but is capped at the national average premium for a bronze level health plan available through the Marketplace. You will owe 1/12th of the annual payment for each month you or your dependents don’t have either coverage or an exemption.

If you must make a payment, you can use the worksheets located in the instructions to IRS Form 8965, Health Coverage Exemptions, to figure the shared responsibility payment amount due.

The earned income tax credit (EITC) is a tax credit for individuals who work and whose earned income is within a certain range. You must meet certain eligibility rules to claim and receive the credit:

• File a tax return even if you generally aren’t required to do so;
• Have earned income within a certain range for your filing status, and 
• Either have at least one qualifying child or meet the requirements for workers without a qualifying child.

You, your spouse (if applicable), and all listed qualifying children must have social security numbers. In addition, you aren’t eligible for the credit if your filing status is married filing separately. The amount of the credit depends on your earned income, filing status, whether you have any qualifying children.

The IRS offers an application, EITC Assistant, that can assist you in determining if you are eligible for the credit and estimating the amount of your credit. The application is available in English and Versión en Español. You can use the EITC Assistant for the current tax year or for prior years.

The premium tax credit – also known as PTC – is a refundable credit that helps eligible individuals and families cover the premiums (payments) for their health insurance purchased through the Health Insurance Marketplace. To claim the credit, you must meet the following eligibility requirements:

• Have household income that falls within a certain range. To be eligible for the premium tax credit, your household income must generally be at least 100 – but no more than 400 – percent of the federal poverty line for your family size.
• Don’t file a tax return using the filing status of Married Filing Separately. There’s an exception to this rule that allows certain victims of domestic abuse and spousal abandonment.

• Can’t be claimed as a dependent by another person.
• Meet these additional requirements: In the same month, you or a family member:
  • Have health insurance coverage through a Health Insurance Marketplace.
  • Can’t get affordable coverage through an eligible employer-sponsored plan that provides minimum value.
  • Aren’t eligible for coverage through a government program, like Medicaid, Medicare, CHIP or TRICARE.
  • Aren’t enrolled in group coverage designated by HHS as minimum essential coverage such as health coverage offered by a college or university to its students.
  • Pay the share of premiums not covered by advance credit payments.

When you enroll, the Marketplace will determine if you’re eligible for advance payments of the premium tax credit, also called advance credit payments. Advance credit payments are amounts paid to your insurance company on your behalf to lower the out-of-pocket cost for your health insurance premiums.

If you get the benefit of advance credit payments in any amount – or if you plan to claim the premium tax credit – you must file a federal income tax return and attach IRS Form 8962, Premium Tax Credit, to your return. You claim the premium tax credit and reconcile the credit with the amount of your advance credit payments for the year on IRS Form 8962.

Before the new tax law, you could deduct as an itemized deduction qualified medical and dental expenses that exceeded 10 percent of your AGI.

Other than the general phase-out of itemized deductions based on your adjusted gross income, there wasn’t a dollar limitation on the amount of state and local taxes you could take as an itemized deduction. You could claim the following types of nonbusiness taxes as an itemized deduction:

• State, local and foreign income taxes;
• State, local and foreign real estate taxes;
• State and local personal property taxes; and
• State and local general sales taxes.

You could deduct as an itemized deduction any interest paid on a mortgage to buy, build, or improve your principal home and a second home, if the debt totaled $1 million or less ($500,000 or less if you were married, but filed a separate tax return).

You were also allowed to deduct interest paid on home equity debt (not used to buy, build, or improve a first or second home) if the debt totaled $100,000 or less ($50,000 or less if you were married, but filed a separate tax return) and totaled no more than the fair market value of your home (reduced by the debt). Debt is the amount you owed on the home.

Previously, you were only allowed to deduct cash contributions to qualifying organizations up to 50 percent of your AGI. This 50 percent limit on cash contributions was limited to 30 percent for certain private foundations.

The deduction limit for contributions of appreciated property was limited to 30 percent of AGI. In addition, you could carry-forward any amounts that exceeded the AGI thresholds for five-years (on future tax returns).

For tax years ending before 2018, you could deduct as an itemized deduction any personal casualty or theft loss to the extent you weren’t compensated by insurance or otherwise if the loss exceeded $100 per casualty and the net total loss exceeded 10 percent of your adjusted gross income (AGI).

For disaster losses in a federally declared disaster area, you could elect to deduct the casualty loss in the tax year immediately preceding the tax year in which the disaster occurred. If you suffered a casualty loss because of Hurricane Harvey, Irma, or Maria, you should read the IRS resources listed below for special rules and relief.

Before 2018, your itemized deductions were limited, if your AGI was more than the following amounts:

• $156,900 for married filing separately
• $261,500 for single
• $287,650 for head of household
• $313,800 for married filing jointly or qualifying widow(er)

In the past, if your AGI was more than the applicable AGI amount, you reduced your overall itemized deduction amount by completing the Itemized Deductions Worksheet.

If you use part of your home exclusively and regularly for conducting business, you may be able to deduct expenses such as mortgage interest, insurance, utilities, repairs, and depreciation for that area. You need to figure out the part of your home, utilities, repairs, and depreciation that you use only for your business activities. There are two methods to help you determine the part of your home used only for your business activities.

Regular Method: You compute the business use of home deduction by dividing expenses of operating the home between personal and business use. You may deduct direct business expenses in full, and may allocate the indirect total expenses of the home to the percentage of the home floor space used for business.

A qualified daycare provider who doesn’t use his or her home exclusively for business purposes, however, must figure the percentage based on the amount of time the applicable portion of the home is used for business. Self-employed taxpayers filing IRS Form 1040, Schedule C, Profit or Loss From Business (Sole Proprietorship), first compute this deduction on IRS Form 8829, Expenses for Business Use of Your Home.

Simplified Option: You may find the simplified option less burdensome than the regular method. If you meet the requirements, you can use a prescribed rate of $5 per square foot of the portion of the home used for business (up to a maximum of 300 square feet) to compute the business use of home deduction. Under this safe harbor method, depreciation is treated as zero and you claim the deduction directly on IRS Form 1040, Schedule C. Instead of using IRS Form 8829, you indicate your election to use the safe harbor option by making two entries directly on the IRS Form 1040, Schedule C for the square footage of the home and the square footage of the office.

This simplified option doesn’t change the criteria for who may claim a home office deduction. It simply makes the calculation and recordkeeping requirements of the allowable deduction easier.