Covering Your Assets: 2020 tax year nuances that may surprise you (Voices)
Covering Your Assets
As an extension of last week’s column regarding tax planning, I thought it would be helpful to hit some of the nuances for the 2020 tax year that may surprise you come April 15, 2021, when you file your taxes.
In fact, the upcoming filing season is going to be trickier for many taxpayers due to high unemployment, working from home and general upheaval due to COVID-19.
Here are a few COVID-19 tax related-issues of which to be aware.
Unemployment benefits are taxable income, which will surprise some filers. Workers are not required to have federal taxes withheld from their benefit payments. While people have the option to have the tax withheld, many do not.
It’s worth noting that unemployment benefits are all subject to federal taxes, but not all states tax it. The good news is that Nevada doesn’t have a state income tax (at least for now).
Taxpayers who unintentionally do not include unemployment income on their taxes will get a “love letter” from Uncle Sam with the tax due, plus penalties and interest charged by the IRS.
You can ask to have the penalties removed (but not interest) by claiming you had reasonable cause for the omission (good luck). Often the best way to sidestep a penalty is claiming that you have timely filed and paid your taxes and beg for forgiveness as a “first-time offender.”
The drop in income from job loss could mean some households are eligible for deductions and credits that they did not qualify for in the past, such as the earned income tax credit or child and dependent care credit. The size of some credits may also change based on income.
Millions of Americans were given payments of $1,200 per adult and $500 per child as a result of the CARES Act. At last count, the IRS said 160 million payments totaling about $270 billion have been delivered.
The good news is that money is not taxable. The bad news, however, and what many people do not realize is that the money they received is actually an advanced payment on the Recovery Rebate Credit for 2020 tax filers.
As such, people who did not receive their payment or only got a partial payment can resolve this issue on their 2020 taxes when they file. If you were overpaid, you will not owe.
Also, if you did not get a relief check because your income was too high, but it has since fallen in 2020 and made you eligible, you also can get the payment via this credit.
WORKING FROM HOME
Working from home became the norm in 2020 for many people, but most won’t likely be able to claim expenses for their new work-from-home setup.
The home-office deduction can only be taken by businesses or the self-employed. The tax law enacted in late 2017 did away with the ability of employees to claim any unreimbursed employee expenses, at least until 2025.
You may consider asking your boss to reimburse you for the use of your home. This income is generally not taxable, and not subject to FICA or Medicare for you or your employer.
One bright spot is a new, temporary deduction for charitable donations. As part of the CARES Act, taxpayers can deduct up to $300 for cash donations given to charity even if they choose to take the standard deduction, rather than itemizing their deductions.
The IRS estimates that about nine in 10 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 when they file.
You may also consider doubling your giving one year, and skip giving in the subsequent year. This works wonders if you are able to itemize in the double year and take the standard deduction in the off year.
The IRS has yet to announce when the tax filing season will open; it typically begins in early January.
The agency has brought some of its employees to the office. But its face-to-face operations with taxpayers will remain extremely limited. The IRS continues to urge taxpayers to file their taxes online and use other online tools whenever possible.
With many IRS personnel not in the office, we are seeing an uptick of IRS notifications without regard to previously filed forms, or previous responses. The IRS has an automated notice system, and unless you or your CPA call and request a hold be put on the account, the notices will continue to fill your mailbox.
This article is general in nature. Ask your CPA how the tax law applies to your specific situation.
Mike Bosma, CPA, is Principal-in-Charge of the Reno office of CliftonLarsonAllen LLP. His NNBW column, “Covering Your Assets,” focuses on effective planning strategies for every business owner. Reach him for comment at email@example.com.
From a national standpoint, research shows the embrace of digital commerce is a whole decade ahead of schedule thanks to the pandemic. We spoke with the Retail Association of Nevada, Downtown Reno Partnership and the Reno+Sparks Chamber of Commerce to give local context to the growth of online retail.