It’s that time of year to think about taxes – but the upcoming filing season is getting a little tougher for many Americans due to rampant unemployment, work from home, and the general upheaval caused by COVID-19.
Here are some pandemic-specific conditions – good and bad – to be aware of.
Unemployment benefit is taxable income, which tax experts believe may surprise some applicants.
Employees are not required to withhold federal taxes from their benefit payments. While people have the option of having the tax withheld, many don’t.
It’s worth noting that unemployment benefits are all subject to federal tax, but not all states tax them.
Taxpayers who inadvertently fail to include unemployment income in their taxes could face a tax charge, penalty or interest levied by the IRS, said Mark Steber, Jackson Hewitt’s chief tax information officer.
The decline in income from job losses could mean that some households are entitled to deductions and credits that they were not entitled to in the past, such as: Such as the Earned Income Tax Credit or the Child and Dependent Credit, said Lisa Greene-Lewis, CPA and Tax Specialist at TurboTax. The size of some loans can also change based on income.
Under the CARES Act, an aid package passed at the start of the pandemic, millions of Americans received payments of $ 1,200 per adult and $ 500 per child. According to the latest count, 160 million payments totaling approximately $ 270 billion were made by direct deposit, check, or prepaid debit card, according to the IRS.
The money is not taxable.
What many people don’t realize, however, is that the money they received is actually an upfront payment on the Recovery Rebate Credit for Tax Advisors for 2020, said Dina Pyron, global tax chat leader at Ernst & Young.
Individuals who have not received their payment or have only received a partial payment can resolve this issue when filing their 2020 taxes. If you have been overpaid, you will not owe.
If you did not receive a relief check because your income was too high, but it has been down since 2020 and qualified you, you can also receive the payment through this credit.
TO WORK FROM HOME
Working from home became the norm for many people in 2020, but most likely won’t be able to claim a cost on their new home facility.
The home office deduction can only be made by companies or self-employed. The tax law passed at the end of 2017 enabled employees to claim non-reimbursed employee expenses until at least 2025. However, in some states, individuals may be able to deduct non-reimbursed employee expenses.
For those who may be able to claim these costs, Greene-Lewis reminds people that the home office must be used “solely and regularly as the main place of business”. That means the table your kids do their homework at or the family has dinner at doesn’t count.
Another big problem is those who moved or moved during the pandemic, which could complicate the question of where to report and pay state taxes, Pyron said.
Employees may need to file taxes in multiple states. Rules vary from state to state, but it’s important that people check the new state’s tax resources for more details, said Jeremiah Barlow, director of family wealth at Mercer Advisors. It’s likely they’ll have two part-year condition returns, one for the old and one for the new, Barlow said.
If people hope to reduce their tax burden by claiming a residence in the state with a lower tax rate, he urges them to be careful.
“States can be aggressive in auditing taxpayers who claim to be no longer resident,” said Barlow. “The requirements vary by state, but they want to find out if taxpayers have given up most of their ties to the old state and instead have closer ties with the new state, such as the new state. B. still own or lease a residence where you are registered to vote and the status of your driver’s license to name a few. “
One bright spot is a new, temporary deduction for charitable donations.
Under the CARES Act, taxpayers can deduct up to $ 300 for monetary donations to charity, even if they choose to use the standard deduction instead of listing their deductions. The IRS estimates that approximately nine out of ten taxpayers now take the standard deduction.
So if someone makes a cash donation before the end of the year, they can get a deduction of up to $ 300 on submission. A deduction lowers both the adjusted gross income and the taxable income for the taxpayer.
The IRS has not yet announced when the tax filing season will begin. It usually starts in early January.
The agency brought some of its employees to the office. However, personal activities with taxpayers will remain extremely limited. The IRS continues to urge taxpayers to file their taxes online and use other online tools where possible.