It is time of the year to start thinking about taxes – but the upcoming application season will be a little more difficult for many Americans due to widespread unemployment, work from home and public unrest due to COVID-19.
Here are some conditions specific to the pandemic – good and bad – that you should be aware of.
Unemployment benefits are taxable income, which tax experts say may surprise some depositors.
Workers are not required to withhold federal taxes from their benefit payments. While people have the option to withhold the tax, many do not.
Note that unemployment benefits are all subject to federal taxes but not all states tax them.
Taxpayers who do not inadvertently include unemployment income in their taxes may face a tax bill, fines, or interest charged by the IRS, said Mark Stepper, Jackson Hewitt’s chief tax information officer.
Lisa Green-Lewis, an auditor and credit, said the decrease in income from job loss could mean that some families qualify for deductions and credits for which they did not qualify in the past, such as the Earned Income Tax Credit or the Child and Dependent Care Trust. Tax expert at TurboTax. The size of some credits may also change based on income.
As part of the CARES Act, the relief package was passed early in the pandemic, and millions of Americans received payments of $ 1,200 per adult and $ 500 per child. At the latest count, the IRS said 160 million payments totaling about $ 270 billion were delivered via direct deposit, paper checks, or a prepaid debit card.
These funds are not taxable.
However, what a lot of people don’t realize is that the money they took is actually a down payment on the 2020 payout balance for tax manufacturers, said Dina Byron, Ernst & Young’s global tax chat manager.
As such, people who have not received their payment or only received a partial payment can solve this issue on their taxes for 2020 when they file. If you’ve overpaid, you won’t be in debt.
Also, if you didn’t get a relief check because your income was very high, but has decreased since then in 2020 and made you eligible, then you can also get the payment via this credit.
Work from home
Working from home has become the norm in 2020 for many people, but most of them probably won’t be able to claim the expense of setting up their new home business.
The home office deduction can only be taken by businesses or self-employed. A tax law enacted in late 2017 removed the ability for employees to claim any unpaid employee expenses, at least until 2025. Some states may allow people to deduct unpaid employee expenses.
For those who may be able to claim these expenses, Greene-Lewis reminds people that the home office should be used “exclusively and regularly as the primary place of business.” This means that the schedule at which your children do their homework or family members eat dinner does not count.
Another big problem, Byron said, is with those who have relocated or moved during the pandemic, which could complicate where they need to report and pay state taxes.
Workers may need to file taxes in multiple states. The rules vary by state, but it’s important for people to check the new state’s tax resources for more details, said Jeremiah Barlow, head of Family Wealth Services at Mercer Advisors. Barlow said they will likely have a case of partial returns to a file, one for the old state and one for the new state.
If people hope to reduce the tax burden by demanding residency in the state at a lower tax rate, he urges them to walk cautiously.
“States can be aggressive about auditing taxpayers who claim to be no longer residents,” Barlow said. “ Requirements vary by state, but they look to see if the taxpayers have given up most of their ties to the old country and have closer ties to the new country instead, such as continuing to own or rent a residence, where you register to vote, and your driver’s license status, for example. This is just one example. “
One bright spot is a temporary new opponent for charitable donations.
As part of the CARES Act, taxpayers can deduct up to $ 300 for cash donations made to charities even if they choose to take the standard deduction, rather than detailing their deductions. The IRS estimates that about nine in 10 taxpayers take the standard deduction.
Therefore, if someone makes a cash donation before the end of the year, they can receive a discount of up to $ 300 when they make it. The discount reduces both the total adjusted income and the taxpayer income.
The IRS has not yet announced the opening date for the tax filing season; It usually starts in early January.
The agency brought some of its employees to the office. But its direct operations with taxpayers will remain very limited. The IRS continues to urge taxpayers to file their taxes online and to use other online tools whenever possible.