The coronavirus could make things more complicated next April 15. If you’re working from home, paying for college, or even just getting a regular paycheck, the virus might disrupt your finances in a way you probably haven’t anticipated.
The 2020 tax laws could change, and at this point nothing is certain. But be aware of these potential tax issues.
Working From Home
Because your office is closed and you’re working from home, can you take advantage of the home office tax deduction?
If you’re a payroll employee who gets a W-2 at the end of the year, the answer is almost certainly no.
If you’re self-employed or a contractor who receives a 1099 instead of a W-2, historically you’ve been able to deduct expenses related to a home office on your taxes. But if you’re an employee whose office is now your kitchen table or your bedroom, no such luck. The Tax Cuts and Jobs Act of 2017 eliminated employee business expenses on Schedule A. Even though you’re using your electricity and Internet, and maybe even your own laptop, those costs aren’t tax deductible.
The location of your home matters, too, if you and your employer are in different states and you previously worked in your employer’s office. If you’ve moved during the year, say to live with family members in a different state, you could face tax issues as well.
If you were sent home to work and your home is in a different state, you could be liable for paying taxes in two jurisdictions. If your employer doesn’t withhold and forward the proper amount of taxes for both jurisdictions, you could be facing a tax bill come April 15. In some cases, working in another state for as little as one day can trigger a tax bill.
Some states have reciprocity agreements with neighboring states that exempt residents from income tax withholding. Most states allow taxpayers to file for a credit for taxes paid to other states. This handy guide can help, but we always recommend checking with your accountant or tax preparer if you think this may apply to you. Everyone’s tax situation is different.
Unemployment and Stimulus
The extra $600 per week in unemployment insurance payments made a huge difference in the lives of many Americans, but it came with a price. It seems unfair, at the very least, but unemployment benefits are taxable in most cases. The IRS has a free tool that can tell you whether you’ll have to declare your unemployment benefits as gross income.
The $1,200 stimulus payment that many Americans received earlier this year, though, is not taxable.
What if you’re eligible for the stimulus payment but haven’t received it? Taxpayers who are required to file but haven’t yet filed a 2018 or 2019 tax return and are eligible for the stimulus payment must file a 2019 return to receive the payment. Taxpayers who aren’t required to file, such as many who receive Social Security, railroad retirement or Social Security Disability Insurance (SSDI and SSI) and veteran’s benefits, should have received a stimulus payment. If not, contact the IRS.
If you don’t typically file taxes because you have limited income, to receive your payment you may have to file a 2019 tax return or visit the IRS non-filers portal.
A number of colleges and universities, no longer able to provide on-campus learning, are refunding some of the tuition students and families paid for the fall semester. If those tuition payments came from tax-advantaged 529 plans, don’t treat that as “found” money. Don’t put it in your savings account to pay for 2021 tuition, either. The tax penalties can be significant: income taxes plus a 10 percent penalty on the earnings.
The tax rules say that distributions from a 529 plan must match with qualified expenses incurred during the same tax year. Money must be returned to the 529 account within 60 days from the date of the refund to avoid the taxes and penalties. Make sure the amount you redeposit exactly matches the amount of the refund, and ensure that it’s characterized as a “recontribution” of a previous-qualified distribution.
Charity and Retirement
The Coronavirus Aid, Relief and Economic Security (CARES) Act, which resulted in most of the tax changes noted here, also contained measures to encourage philanthropy and ease restrictions on retirement plan withdrawals.
On the charity side, the act included a new deduction for charitable giving even if you don’t itemize your taxes. This is an above-the-line” deduction for charitable gifts made in cash of up to $300.
The CARES Act also eased restrictions for people facing financial hardship who are under 59 ½, waiving the usual penalties for early withdrawals from retirement plans. Withdrawals can be paid back within three years and will be treated as a tax-free rollover, making it possible to “return” some or all of the withdrawal to a retirement account without tax penalties.
This one is still a bit uncertain. On August 8, President Trump signed an executive order deferring payroll taxes through the end of 2020. Because the order only defers, but doesn’t eliminate, those taxes, they’ll come due in 2021.
Workers who see their paychecks rise because payroll taxes are no longer being deducted will see their checks drop in January as those deferred taxes are subtracted from their paychecks. In other words, you could wind up paying no payroll taxes for the remainder of this year, and then double payroll taxes from january-April of next year.
The tax deferrals are voluntary for private employers, and so far few companies have announced that they plan to reconfigure their payroll systems to defer the taxes. If they do, employees who earn up to $4,000 every two weeks and less than $104,000 annually will see the payroll deduction disappear for the rest of 2020 and then be responsible for paying the deferred taxes from January to April of 2021. It’s possible Congress may act to forgive the deferred tax, but as of this moment that doesn’t seem likely. It’s also possible that employers may make this tax deferral voluntary for employees.
However, federal employees and members of the military will see their taxes deferred for the remainder of 2020, subject to the income ceiling mentioned above.
And, no, if your employer defers payroll taxes through the end of the year you can’t quit on December 31 and avoid paying them back. Deferred taxes that aren’t paid back by April, 2021 will be subject to interest and penalties.
Don’t be fooled into thinking this means your income taxes are being deferred. Payroll taxes are not income taxes. Payroll taxes are also known as FICA, which includes Social Security and Medicare.
It’s certainly possible that many of these tax issues may change between now and the end of the year, or even next year before April 15. Talk to your financial advisor, accountant, or tax preparer about financial moves you should make before the end of the year if any of these factors apply to you.