This is a question that taxpayers have been asking increasingly in recent years, and quite understandably so. The damage and losses caused by natural disasters such as tornadoes, floods, and hurricanes, together with man-made events like forest fires, have caused home insurance premiums to rise dramatically as insurance companies scramble to pay rebuilding costs and compensation to their policy holders. According to the online insurance marketplace, Policygenius1, the nationwide increase in inflation during the past year, together with the increased costs of rebuilding homes and replacing their destroyed contents, resulted in a 12.1% increase in home insurance premiums in 2022. The increase in premiums was even higher in states such as Arkansas, Washington, Colorado, and Texas. Given these facts, it’s no wonder that homeowners are hoping to find some relief through a possible tax deduction!
Well, the answer to the question about home insurance all comes down to whether or not you can claim a home office deduction. And I’m here to tell you there is both good news and bad news on this front.
Let us begin with the bad news to get it over and done with. Up until the beginning of the 2018 tax year, many employees who worked from home were potentially able to claim a deduction for the business use of their home as an itemized deduction on Schedule A. This meant that they could deduct some of the overhead costs of running a home, such as a portion of their utility bills, mortgage interest or rent, and home insurance. But thanks to a change in the tax laws, that deduction has been suspended for the tax years 2018 through 2025, along with a number of other miscellaneous itemized deductions. States that have not conformed to these federal changes may still allow qualified taxpayers to claim a portion of their paid home insurance premiums as part of their “office in home” deduction on their state return.
But despite all of that, the good news is the home office deduction may still be available on your federal return if you are self-employed or a sole proprietor, and you use part of your home for business in at least one of the following situations:
- You use an area in the home exclusively and regularly as your principal place of business.
- You use an area in the home exclusively and regularly as a place where you meet or deal with patients, clients, or customers in the normal course of your trade or business.
- You use an area in the home on a regular basis for the storage of inventory or product samples.
- You use the home as a daycare facility.
Further details of the meanings of the terms “exclusive use”, “regular use”, “trade or business use”, and “principal place of business” are provided in this earlier blog article. If you’re not sure whether you qualify for the home office deduction, you may want to check with your accountant. But if you do qualify to claim the deduction, the next task is to calculate the actual amounts you are eligible to claim – including home insurance.
The point here is that if you have a dedicated area inside your home that you use exclusively for business according to the rules outlined above, then you can deduct the costs of providing that dedicated area. This means that you can deduct a portion of the costs for keeping up and running the entire home such as water, electricity, mortgage interest or rent, and general repairs. Most importantly, for the purposes of this article, you can also deduct a portion of the insurance premiums that you paid to cover the home.
The amount of the above costs, including insurance, that you can deduct is based on the portion of the home that is used for business purposes. According to the IRS, business-use percentage can be calculated by “any reasonable method.” The most often-used methods are:
- The square footage of the area used for business divided by the total square footage of your home, or
- If all of your rooms are about the same size, you can divide the number of rooms used for business by the total number of rooms in the home.
For example, let’s assume you live in Oklahoma and you paid the statewide average of $4,122 to insure your home last year. Your home is 2,400 square feet in size, and you used an area of 400 square feet exclusively and regularly for business for the entire year. The annual deduction for the insurance portion of your home office deduction is calculated as follows: $4,122 x (400/2400) = $687. To calculate the full amount of the home office deduction, you would also add on the same proportion (400/2400) of your utilities, mortgage interest or rent, and other costs of providing the home office space to the $687 amount we just calculated for home insurance.
To put it all in a nutshell, if you meet the conditions for the home office deduction, you are allowed to deduct a portion of your insurance premiums. Just make sure to keep good records of all your expenses related to keeping a roof over your head throughout the year so that you can benefit from the full deduction that you’re entitled to claim.
[1]
www.policygenius.com/homeowners-insurance/home-insurance-pricing-report-july-2022/