The tax deadline is quickly approaching! Below is a list some tax related items you may want to consider as you prepare your 2020 federal income tax return. Many of these changes result from Congress’s response to the COVID-19 pandemic. Please note this blog is for informational purposes only, so make sure you consult your tax, legal, and accounting professional before modifying your tax-filing strategy!
1) Tax day for individuals is extended to May 17.
The U.S. Department of the Treasury is delaying the April 15th deadline to file and pay taxes until May 17th. This gives individuals and businesses another month to file and pay the government what they owe. The extension only applies to individual federal income returns and tax payments due April 15, 2021, not state tax payments or deposits or payments of any other type (i.e., estimated quarterly tax payments) of federal tax. For more details, see the IRS press release dated March 17.
2) Since I worked from home and had to buy a new desk and a monitor, can I take the home office deduction?
Chances are that you can only take the home office deduction if you are self-employed, an independent contractor, or a “gig worker.” Before the 2017 Tax Cuts and Jobs Act became law, there were instances when employees could include unreimbursed business expenses if they worked from home. The 2017 tax code overhaul paused the home office deductions for employees through the end of 20251. If you purchased items for your home office during the pandemic, you might want to ask your employer to reimburse you or provide a stipend for office supplies you bought to set up your home office.
3) I worked from home during the pandemic, but my employer is in a different state. Is this an issue?
Where your employment income is taxed is a complex matter and the rules vary by location. For example, a case filed by the state of New Hampshire is expected to go before the U.S. Supreme Court on this issue. In this case, the state of New Hampshire desires to protect its citizens that “worked from home” from being taxed by Massachusetts, which is where they typically work (which makes them subject to that state’s income tax laws).2
Other states have issued clear guidance that they will not take advantage of the changes brought about by the pandemic and will not tax the income of individuals who temporarily worked from home. We recommend you consult your tax professional if this is an issue for you.
4) Am I required to take distributions from my retirement accounts?
The required minimum distribution (RMD) is the minimum amount you must withdraw from certain tax-advantaged retirement accounts (IRAs, 403(b)s) each year once you reach a certain age (72 if your 70th birthday was July 1, 2019 or later; 70 1/2 for everyone else). The CARES Act suspended all RMDs that would normally be required for 2020. For 2021, the IRS reports that RMDs will be required by December 31, 2021.
5) I received unemployment benefits; will those be taxed?
Unemployment compensation is generally taxable at the federal and state levels though there are exceptions. The IRS states that The American Rescue Plan Act makes the first $10,200 of benefits tax-free for 2020 if your income is less than $150,000. If you have already filed your taxes, ask your tax preparer to file an amended return, if necessary.
Any unemployment compensation received during the year must be reported on your federal income tax return. If you received unemployment during the year, you should receive a FORM 1099-G from your state’s unemployment office. For more information, contact www.irs.gov/UC.
6) Are stimulus payments taxed?
No. According to the IRS “The payment is not income and taxpayers will not owe tax on it. The payment will not reduce a taxpayer’s refund or increase the amount they owe when they file their 2020 return or 2021 tax return next year.”
7) How have the rules changed for Charitable Giving?
Yes. The rules have been adjusted and may motivate more people to support charities during the pandemic. Before the CARES Act, charitable contributions could only be deducted if taxpayers itemized their deductions on Schedule A. For 2020, you can take a deduction of up to $300 for cash contributions to qualifying organizations, even if you use the standard deduction. For 2021, the deduction limit will double to $600 for joint filers. It will remain $300 for single taxpayers.
If you itemize your deductions, you can make a cash donation to a qualifying charity and deduct up to 100% (previously 60%) of adjusted gross income in 2020.
Rules around contributions to donor-advised funds did not change.3
8) What about the rules around child tax credits?
The child tax credit helps families offset the costs of raising kids. A credit is just that – it gives you your money back or reduces the taxes you must pay. The child tax credit traditionally provides a credit of up to $2,000 per child under age 17. The American Rescue plan temporarily expands the child tax credit for 2021 by increasing the child tax credit to $3,000 per child ($3,600 per child under 6) and expands the definition of a qualifying child to include 17-year-old dependents. In 2021, the child tax credit will be fully refundable for qualifying households.
Families who are not eligible for the higher child credit for 2021 would still claim the regular credit of $2,000 per child. The phase-out starts at $200,000 for individuals and $400,000 if filing jointly. According to the relief plan, the additional credit will phase out for single filers at $75,000 and joint filers at $150,000.4
The new “Look-back rule” allows taxpayers to use their 2019 income instead of 2020 (if it is higher). This will generally result in a larger credit.
9) Can I still contribute to my IRA?
Yes, and we recommend you fully fund your IRA. The 2020 total contribution limit for traditional IRAs and Roth IRAs cannot be more than $6,000 ($7,000 if you are over age 50). You may make contributions until the new tax filing date of May 17, 2021.5
10) What are some of the changes with regards to dependent and health care FSAs?
For FSA Rollovers, employees may carry over all or some of their unused health and/or dependent care FSA funds from 2020 to 2021 and 2021 to 2022. This is good news if you are a caregiver and had money left in your FSA at the end of year, or if you put off a medical procedure. Under normal circumstances, the funds in these accounts are typically required to be spent by year end or be forfeited.
The new relief bill also boosts the amount that companies can allow workers to deposit in their dependent-care FSAs for 2021. For married couples filing jointly, the cap is $10,500, up from $5,000. For single filers, the limit is $5,250, up from $2,500.
Health FSA contributions are unaffected by the latest stimulus bill, meaning contributions to Health FSAs are still capped at $2,750 for individuals or $5,000 per family.
It is important to note that employers can choose whether to make modifications to their plans under the temporary rule changes but are not obligated to do so.6
11) I am a teacher and have purchased PPE supplies for my classroom. Can I write those off?
Yes! Items (i.e., masks, hand soap, and tape to guide social distancing) purchased by educators after March 12, 2020 to help prevent the spread of coronavirus can be written off. You are still subject to the $250 deduction limit that was previously available for books and/or supplies but now any PPE recommended by the Centers for the Disease Control and Prevention can be deducted.7
Sources:
1. Keshner, Andrew “Can you claim the home office tax deduction if you’ve been working remotely?” MarketWatch, accessed March 24, 2021,https://www.marketwatch.com/story/can-you-claim-the-home-office-tax-deduction-if-youve-been-working-at-home-read-this-first-11613614136
2. Karpchuk, Jennifer “How Granting Cert in New Hampshire v. Massachusetts Could Impact Pennsylvania and Philadelphia” Bloomberg Tax, accessed March 23, 2021,https://news.bloombergtax.com/daily-tax-report/how-granting-cert-in-new-hampshire-v-massachusetts-could-impact-pennsylvania-and-philadelphia
3. Bernard, Tara Siegel and Lieber, Ron “How the Pandemic Has Changed Your Taxes” nytimes.com, Accessed March 24, 2021,https://www.nytimes.com/2021/03/12/your-money/taxes/covid-taxes-2020.html?smid=em-share
4. Sheridan, Johan “Child Tax Credits increased for 2021” news10.com, Accessed March 25, 2021,https://www.news10.com/top-stories/child-tax-credit-increased-for-2021/#:~:text=For%20the%20standard%20%242%2C000%20child,Copyright%202021%20Nexstar%20Inc.
5. “Maximum IRA Contribution Limits for 2020-2021” IRAresources.com, Accessed March 29, 2021,https://www.iraresources.com/blog/tax-deadline-2020-ira-contributions
6. Rosato, Donna “COVID-19 Relief law Makes FSAs Even More Flexible” Consumer Reports.com, Accessed March 25, 2021,https://www.consumerreports.org/health-insurance/covid-19-relief-law-makes-fsas-even-more-flexible/
7. Cohn, Michael “IRS offers guidance for teachers on deducting PPE expenses” Accountingtoday.com, Accessed March 25, 2021,https://www.accountingtoday.com/news/irs-offers-guidance-for-teachers-on-deducting-ppe-expenses