This paper explores an aspect of the new tax law changes concerning people who work from a home office says, William D King. This realm is fairly grey and has been complicated by a previous court ruling on what constitutes a true ‘home office. ‘The first part of the paper gives some general background on this issue, which will provide a framework for understanding how it can affect you as a homeowner or as someone who works from home. The second part delves into some more specific issues that homeowners may face under these proposals. In particular, there are examples given on the application of this new law to those with paid child care at home, those with adult children living at home, those with home businesses, and those claiming expenses against rental income.
Work-space in your home
One of the changes that were introduced through the tax reform package in November 2015, is that if you have an area of your home set aside exclusively for workspace, you are not able to claim it as a deduction against rental income.
According to this article from Forbes Magazine on December 31st, 2015, “The House version of the bill passed last month included a provision requiring people who earn money by renting out rooms or other spaces in their homes to count those earnings as business income rather than passive income. The Senate modified these rules so homeowners can exclude up to $1,000 per month in rental income from their taxable earnings.”
For example, consider someone who rents out one room in their house at dollars per week ($2400 per year) and has a two-bedroom house. This income would be considered taxable under the new proposals, whereas it is currently not regarded as taxable (personal use).
The upshot of this is that under these rules if you claim expenses like mortgage interest, insurance. And repairs on your rental property against your rental income for tax purposes. Then you will need to set aside dollars per week for this work area. In order to claim it as a deduction against the dollars per week rent. Or relinquish any such deductions (i.e., not claiming the home office as an expense).
You may ask why anyone would make such ‘room available’ when they can’t claim those expenses? The answer is simple; there are significant tax advantages to offset rental income with expenses. By claiming the home office deduction, you would reduce your taxable rental income by ‘at at least’ one-third (see note 1).
The problem for homeowners is that this comes at a cost to the total pool of tax dollars collected. Therefore has been deemed non-viable. The situation presently is that it depends on which party forms the government. As to whether or not these proposed changes will be implemented explains William D King.
Now let’s return to our example above someone who rents out one room in their house. At dollars per week and has a two-bedroom house. This person makes no claim on the home office, so they pay tax on all $2400 per year. Under the new laws, if this person loses their job and needs to claim the unemployment benefit. They will be taxed on dollars per week.
Example 1: Person works from home one day a week at $60/hr for 20 hours per week (hours x rate = income). They need to set aside a room to store equipment. And have an area where work is carried out says William D King.
The above example shows that the person must not only forgo claiming expenses against their rental property. But also lose any tax benefits associated with it. This may well mean that the net dollars are unchanged. But this does not take into account that if you earn more dollars. Then you can purchase more goods and services. Which in turn creates jobs in other sectors of the economy. As stated earlier, these changes were deemed non-viable. So while they are currently part of the changes proposed, they may not be implemented.
Let’s talk about per child tax benefits!
A new proposal is to remove the tax exemption for per child tax benefits. Which would have the effect of taxing any dollars paid in excess of $2,000 for each child under 16 years. William D King says this basically means. That if you earn enough dollars to claim this extra benefit then you will be taxed on it. If you don’t claim this benefit because your income drops below the threshold necessary to claim it. Say in a business downturn or with reduced hours in employment – it means that you will not receive the benefit until your circumstances change. For better or worse (i.e., when extra income is earned or when one spouse passes away).
I’m sure that most people would agree that there are some people with high earnings. Who do not deserve to receive the benefits of government services. Which are meant for society as a whole says, William D King. However, what about those on average incomes? The changes proposed will affect them more than anyone else – both directly and indirectly. What about those lucky enough to have jobs or be self-employed? Don’t they deserve their share of the tax cuts that are being handed out by the present government?