It goes without saying that 2020 has been a year like none other. Masks mandates, social distancing, no dining in, toilet paper shortages, working from home and limited entertainment options have made it a challenge to enjoy life. But if you’re a “glass half full” kind of person, there have been some positive things this year – more time with family, the ability to work from home (you can’t beat the commute) and a little bit of cash from the government.
As we head into December, you’ll want to start thinking about your taxes. It might not be the most enjoyable thing to consider, but because of all the changes caused by the COVID-19 pandemic, it’s better to plan now so you don’t pay big later.
Here are some considerations that may impact your 2020 returns. You should ask your accountant about them when tax season starts in January:
Teleworking (Working from home)
Normally, you pay taxes on income you made in the state where you live and the state where you work. But because some employers asked their employees to work from home most of 2020 to prevent the spread of the coronavirus, some workers may end up paying taxes to two states. This could happen if you’ve moved, even temporarily, but your income is still coming from work done for a company located elsewhere.
If you didn’t ask your employer to withhold taxes for the appropriate states, you might get an unexpected tax bill. Working even one day in another state could trigger taxation. Some states have agreements with other jurisdictions to exempt employees from this. In addition, you may have local tax implications if you work in one city, but live in another. Ask your accountant about your specific situation to see if you’ll need to plan to pay two tax bills.
You might recall that President Trump signed an executive order in August to allow companies to stop withholding payroll taxes from their employees’ checks. It was designed to give you a little extra cash in our check – maybe you noticed the difference.
But that payroll tax (about 6.2 percent) that was not withheld didn’t just disappear – it was deferred. That means that it’s possible that come early 2021, millions of workers might see a significant pay cut as businesses try to recoup some of those lost taxes.
Unless Congress acts to forgive the deferred tax, the break could become a burden for a lot of people. From January through April, employers will have to recover the payroll money they didn’t withhold. That means that you need to start planning ahead now to figure out how you might come up with that money. Note: Those participating will receive an amended W-2 when deferred taxes are repaid in 2021. In that case, you may choose to file return normally.
Home office deduction
You’ve been working from your couch, bedroom, basement or kitchen table for 9 months. That means you can take a home office deduction, right? Not so fast. Unfortunately, employees are not eligible to claim the home office deduction, even if an employer requires remote work because of Covid-19.
The Tax Cuts and Jobs Act passed in 2017 eliminated employee business expenses on Schedule A. However, if you are an independent contractor and self-employed, you can still take a home office deduction. If you need help determining if you are, a CPA can help.
Refund of 529 funds
Some colleges went to all virtual classes because of the coronavirus, which means they reversed on-campus housing decisions or sent students home. You might want to know that if you used money from a 529 college savings plan to cover the cost of housing and food, you’ll need to put the money back to avoid paying income tax and a 10 percent penalty on the earnings.
Why? Because a 529 plan allows contributions to grow tax-free. So here’s the issue when it comes to education expenses: You can’t keep the money; otherwise, it’s considered what is called a non-qualified distribution. Ask your accountant why that matters.
You also can’t hold on to the money you took out this year to cover 2021 expenses. Distributions from a 529 plan need to match up with qualified expenses incurred during the same tax year. An account holder has just 60 days from the date of the refund to return the money to the 529 account without incurring taxes and the 10 percent penalty on earnings.
Other areas of change include:
Many of these changes are interrelated. In other words, as one item above changes another deduction or credit may also be affected.
Hire a professional
If you’ve always filed your own taxes and think you have things down to a science, you might want to think twice this year. If there was ever a year to ask for a professional’s help, 2020 is it. Tax preparation will be as complicated as ever and if you miss something, the consequences could be huge.
If you are self-employed or a business owner, there are many more tax changes not mentioned above. Congress is still discussing tax laws changes and another stimulus package in the lame duck session. Therefore, more changes are expected. To make sure your return is completed correctly, contact a professional whose job it is to be updated on all the most current tax laws.
For more information or to set up an appointment, contact our Salem office at 330-332-4646 or East Liverpool office at 330-385-2160.