Renters. For those who rent their home, the major advantage of the home office deduction is that a portion of your rental payments will be deductible. Renters who don't qualify for the home office deduction ordinarily can't deduct any of their rental payments, so working out of your home can result in significant tax savings.

Homeowners. For homeowners, your deduction is not based on the fair rental value of the home. Instead, you may deduct a portion of your real estate taxes and your qualified mortgage interest (but not principal) payments on the home. You can also claim a depreciation deduction to recover some of the home's purchase price.

"Real estate taxes" include the amount of taxes actually paid to the taxing authority on your behalf during the year. This may be different from the amount that your mortgage holder requires you to pay into an escrow account. Real estate taxes do not include amounts paid to any homeowner's association or condominium association. They also don't include assessments for local benefits like streets, sidewalks, or water and sewer systems - instead, these amounts may be depreciated.

"Qualified mortgage interest" may include interest on a second mortgage, or a home equity loan. However, there are dollar limits that apply. Only interest on mortgages up to $1,000,000 ($500,000 if married filing separately) used to buy, build, or improve your property, and interest on home equity loans up to $100,000 ($50,000 if married filing separately), is considered "qualified." If you think either of these limits might apply to you, consult your tax advisor or get IRS Publication 936, Home Mortgage Interest Deduction, for more detailed information on computing your deduction.

For both renters and homeowners, the deductible portion of the rental, tax, or interest payments depends on the percentage of the home's space that is used for business. If you start or stop using the office during the year, the percentage of time that the office is used will also be a factor.

Save Money Of course, homeowners would be able to deduct all their real estate taxes and qualified mortgage interest as itemized deductions, regardless of whether they use their home for business purposes. Claiming these expenses as part of the home office deduction basically means shifting them to a different tax form (Form 8829). One major advantage to this is that by claiming these amounts as a business deduction, you reduce the net income on which you must pay self-employment taxes. For higher income taxpayers, there can be another advantage, because most itemized tax deductions are phased out for those with high levels of income while business expense deductions, including the home office deduction, are not. Furthermore, claiming the home office deduction means that some of your real estate taxes and mortgage interest will be used to reduce your adjusted gross income (AGI), which in turn can improve your eligibility for numerous tax benefits including IRAs, miscellaneous itemized deductions, and the deduction for medical expenses that exceed 7.5 percent of AGI.

Among the Business Tools are Form 1040 and Form 8829. They are in Adobe Portable Document Format (.pdf), and you will need the free Acrobat Reader to view and print the file.