Feeling uncertain about the upcoming tax season? Let's be real, Covid-19 has caused a disruption in how we approach finances, and things are going to look different from the usual. To help you prepare for tax season, we've compiled a list of common variables that might change your tax situation come 2021.
5 Ways Covid-19 May Affect Your 2020 Taxes
1. Working Remotely
If you live in a different state than you typically work, then you're probably unsurprised that you're taxed on income in both the state that you live and the one you work. However, working even one day in a different state can trigger a double taxation. To prevent an unexpected tax bill, you must instruct your employer to withhold taxes in those states.
To further complicate things, you probably can't take a home office deduction. While you may be at home, anyone considered an employee is not eligible for this deduction. The Tax Cuts and Jobs Act, passed in 2017, disqualified home offices as a typical employee expense. If you work as an independent contractor or freelancer, you're in luck - you can deduct a space designated solely for business.
Unemployment checks have been a saving grace for many furloughed employees this year. However, unemployment money isn't tax-exempt. If you've been collecting checks, you must claim that as income on your 2020 taxes. If you haven't already, consider setting aside some of your money in case your tax bill is higher than expected.
3. 529 Savings
Colleges across the nation have had to make tough calls due to Covid-19. Many have sent students home mid-semester and gone virtual or closed altogether. If you've received a refund for education or housing costs, the IRS can tax you on that money depending on the source. 529 plans are tax-deferred savings vehicles for education. If you withdrew money to pay for school expenses, and received it back, it can be considered a non-qualified distribution.
If you don't return the money within 60 days of the refund, you'll pay a 10% tax penalty in 2021. Just be sure to characterize your payment as a re-contribution, and that it matches your withdrawal to the cent. This way, you'll avoid any repercussions, and have the funds available when schools reopen.
4. Debt Forgiveness
If you've received any kind of debt forgiveness this year, expect to pay taxes on the amount of that forgiveness. Though it's called canceled debt, you're still expected to report that cancelled debt on your taxes in the year of cancellation. Don't worry about confusion, as you'll most likely receive a 1099-C form with the important information such as the amount and date of cancellation. Should you not receive one, make sure you know this information. There may be other forms you must file, which you can find on the IRS website.
5. Recovery Rebate Credit
If you believe you were eligible for a stimulus check, and still haven't received one, there's still a way to get your money. The IRS is calling it a Recovery Rebate Credit, and it comes in the form of a tax deduction. In order to claim this deduction, you must hang on to the Notice 1444 you should have gotten in the mail. Referring to this notice will allow you to claim any unclaimed credits if eligible.
6. Deferred Payroll Taxes
Tax deferrals are just that: deferrals. Unfortunately, someone must eventually pay those taxes. The IRS has allowed employers to defer payroll taxes, which may have provided a temporary boost to their business. However, come 2021 those taxes will be due. For employees, that could spell pay cuts and layoffs to cover the costs.
The withholding only affects employees who earn less than $104,000 annually.
Don't Go Into Tax Season Blind
2020 has been an unprecedented year, and we can look forward to an unprecedented tax season. As the year comes to a close, be aware of how the financial changes in your life could lead to tax changes. Note how your life has changed financially, so you file everything correctly. Then you can go confidently into 2021, knowing you'll have all the information you need.
Everyone may expect tax season to be a mess next year, but you don't have to be. If you want to be sure your taxes are filed correctly, we recommend consulting with a qualified tax professional.