Today's guest post is brought by Matthew C. Klein
Feb. 13, 2021
If you’re confused about how the pandemic affected your 2020 taxes, you’re not alone.
Tax experts are still navigating the implications of the Cares Act, the Families First Coronavirus Response Act, and the Consolidated Appropriations Act of 2021. Businesses received some brand-new breaks and programs, such as the employee retention credit and the Paycheck Protection Program. Individuals received a hodgepodge of deductions, credits, and other breaks that are dependent on an array of information.
What’s more, Covid-19 is still causing delays within the Internal Revenue Service, including their live phone support, processing paper tax returns, answering mail from taxpayers, and reviewing tax returns, “even for returns filed electronically,” says Susan Allen, senior manager for Tax Practice & Ethics with the American Institute of CPAs. “These complexities can make for a challenging tax season.”
In an effort to bring a little ease to a tough topic during a tough time, Barron’s sought out answers to some of the questions accountants and financial advisors are hearing most frequently.
When is this year’s tax deadline? Will it be extended like last year?
This year’s deadline is Thursday, April 15, and it won’t be extended, even though the IRS, which usually starts accepting returns in mid-January, started taking them on Feb. 12.
If you need more time to file, you can request an extension until Oct. 15. If you expect to owe money, you must pay an estimated amount by April 15. The six-month extension request is Form 4868 for individuals, and Form 7004 for businesses, and you don’t need a reason; you just need to request it.
Will I owe tax on the stimulus check I received last year?
No. The economic impact payments, better known as stimulus checks, were a tax credit for your 2020 taxes. For them to have an immediate economic impact, the government decided to send these checks as an advance on the 2020 tax credit. To do so, eligibility was based on income reported on the most recent tax return the IRS had.
The first round of the Cares Act gave up to $1,200 to single people who earned up to $75,000 annually, or $2,400 for married couples earning up to $150,000 annually, plus another $500 per child under 17, based on their 2018 or 2019 tax returns. Single filers who earned up to $99,000, couples who earned up to $198,000, and heads of households who earned up to $136,500 got smaller amounts. A second round of smaller stimulus payments–generally half of what was given in the Cares Act–was paid out in December.
They do need to be reported on this year’s taxes, though. The 1040 form has a new entry, line 30, “Recovery Rebate Credit” that must be filled out.
Because much of the money was sent early in 2020, there are people who saw their income drop later in the year. If you were not eligible for the stimulus checks based on your 2019 return but would be based on your 2020 earnings, you can still claim the credit. If the reverse is true, and you received the money but it turns out you earned too much in 2020 to be eligible, you won’t be asked to return any money you received.
What if I was unemployed in 2020? How does unemployment affect my taxes?
Unemployment payments are taxable. “When you applied for unemployment benefits, you had the option of having taxes taken out,” just like your withholding from wages, says Mark A. Luscombe, principal federal tax analyst at Wolters Kluwer Tax & Accounting. If you didn’t do that, you will owe federal and state taxes on your unemployment income. You’ll get a tax form, a 1099-G, that will include how much you were paid and how much tax was withheld.
One thing to be aware of, Luscombe says, is that there have been problems with fraud this past year. Some people have discovered that scammers used their identities to claim unemployment checks they weren’t entitled to. If you receive a Form 1099-G for unemployment benefits you didn’t claim, you’ll have to contact your state unemployment agency to clear up the issues around that identity fraud before filing your taxes, he says. If you can’t resolve it before you file your tax return, “go ahead and file, and attach a statement that you’re trying to get it corrected.”
What are the income tax brackets, and how are they different from last year?
Your tax bracket depends on your income in 2020, but under a marginal tax rate, only some of that income is taxed at that percentage level.
The marginal tax rate is the highest rate that applies to your taxable income–what’s left after you’ve taken all your deductions.
The lowest bracket is 10%, which is applied to the first $9,875 of taxable earnings, and the top marginal tax rate applies to a single individual with taxable income of more than $518,400, or $622,050 for a married couple filing jointly.
“Due to the standard deduction, a single taxpayer with a gross income of $12,200 or less would not owe any income tax and would not need to file a return unless he or she needs to do so to obtain a tax refund,” Luscombe says. You should also file a tax return to ensure you receive your stimulus check.
The income tax brackets for filing in 2021 are slightly higher than last year’s brackets because they are adjusted for inflation.
If I worked from home in 2020, can I claim deductions for my home office costs?
If you worked from home because of stay-at-home orders, “you can’t deduct those unreimbursed expenses for your home office, because the Tax Cuts and Jobs Act eliminated those deductions” through 2025, Allen says. She suggests you ask your employer to reimburse expenses for home-office setups or supplies.
Those who are self-employed can deduct their home office and business expenses as they would normally do.
What if I worked in a different state or remotely for an out-of-state employer during the pandemic?
It depends, so check your state-specific department of revenue for any tax credits you may qualify for. “You want to eliminate the double taxation that can come from those situations,” Allen says.
Some jurisdictions, such as Maryland, Virginia, and the District of Columbia, let commuting workers pay taxes to their home states. Other states, according to The Wall Street Journal, have said they will be lenient with remote workers in 2020, but the rules vary.
I home schooled my children last year. Can I claim an educators’ deduction?
Probably not. The $250 educator deduction is for unreimbursed expenses such as books, professional development courses, and other classroom expenses. This year, it also includes the cost of personal protective equipment, disinfectant, and other items to prevent the spread of coronavirus, bought on or after March 12.
“It’s intended for qualified eligible educators–teachers, principals, counselors–and you’d have to meet that definition,” Allen says. The IRS considers eligible educators those who work at least 900 hours a school year in a qualified kindergarten through 12th-grade school.
What about charitable donations?
Thanks to the Cares Act, you can deduct up to $300 this year for cash donations to charity in 2020 as an “above-the-line” deduction that reduces your taxable income, so long as you can document what you gave with a tax receipt from the organization. The limit is $300 per return, even for married couples filing separately. But that amount will increase to $600 for joint filers in 2021.
Can I file my taxes for free?
In 2019, ProPublica published an investigation showing how Intuit, the maker of TurboTax, was deliberately hiding its TurboTax Free File from Google searches to drive more people to its paid TurboTax site. The outcry, including being blasted by comedian Hasan Minhaj, prompted Intuit to change its search coding and let users more easily find the free Intuit site. The free site is for those who earned $39,000 or less, were active-duty military members with incomes of $72,000 or less, or who qualify for the earned-income tax credit for low-income workers.
But TurboTax isn’t the only way to file your taxes for free.
The IRS’s Volunteer Income Tax Assistance (VITA) offers free tax preparation help for those who make $57,000 or less, have disabilities, or who are limited English speakers. “They will actually prepare your return if you meet the income threshold,” Allen says. A list of open sites and resources is on the IRS website.
The IRS’ Tax Counseling for the Elderly (TCE) programs helps taxpayers who are 60 years or older with questions about retirement, pensions, or other issues. Both VITA and TCE are staffed by trained volunteers who are required to know tax laws and keep information confidential.
How do IRS penalties and interest rates work? What happens if I ignore them?
Ignoring the IRS won’t make your taxes go away. “They usually say the IRS is not a good person to borrow from, because if you fail to file on time or you fail to pay your penalties, they can both add up,” Luscombe says. And if there’s evidence you deliberately tried to underpay what you owe, you can face criminal charges.
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