While homeowners receive many opportunities to claim deductions and credits on their tax returns, renting affords few comparable opportunities. Few circumstances exist that permit renters to deduct rent payments from their tax returns, so it is best to understand when such opportunities are legitimate versus when they are illegal.
If you use part of the home you rent as a home office, you may be able to deduct part of your rent payment as a business expense. First, your home office must be used regularly and exclusively for business to qualify. Then you calculate the percentage of your home that is the home office, multiply that percentage by your annual rent payments, and the result is the total you may deduct from your federal tax return if you itemize.
Rental income — income made from renting out a property — may not be deducted from your federal tax return. In fact, it is considered taxable income, and you must report it to the IRS. However, expenses for the rental, such as improvements or renovation costs, may be deducted from the rental's reported income as a tax break.
Certain states, like Massachusetts, permit taxpayers to deduct a percentage of their rent payments from their state tax returns. Massachusetts permits 50 percent of total rent paid to a maximum of $3,000 for the tax year. Other states like California provide renters a credit on their state taxes for up to $120 depending on your filing status and income for that tax year. Each state has its own laws on renter's credits and deductions as well as individual requirements for eligibility.
When You Cannot Deduct
For federal taxes, if you are simply renting an apartment for a place to live, there is nothing in the Internal Revenue Services tax code that permits deducting your rent from your income tax return. In fact, doing so will most likely trigger an audit, which could result in owing the IRS fines and penalties for falsely claiming an invalid rent deduction.
Based in Southern California, Daniel Holzer has been a freelance writer specializing in labor issues, personal finance and green living since 2004. His recent work has appeared online at Green Your Apartment and other websites. Holzer studied English literature at California State University, Fullerton.