Taxes are already complex, and the coronavirus pandemic only made them worse.
We spoke with Rhonda Collins, director of tax content and government relations at the National Association of Tax Professionals, about how stimulus checks, unemployment payments or home office expenses might change how you file taxes this year.
Congress approved three rounds of stimulus checks since March 2020. If you received money from any of them, it is not taxed. But each had their own qualification criteria and were primarily based on an individual’s 2019 taxes. So if your 2020 income was significantly different from the previous year, you may not have received the support you were due.
Perhaps you didn’t receive one of the checks, but you think you were entitled to a payment. Collins explains how to find out if you’re due to receive more money. “ When you’re completing your 2020 tax return, you would want to complete the Recovery Rebate Credit worksheet,” Collins says. “It’s just a reconciliation. It’s like balancing your checkbook.” Yes, she admits, it’s more work, “but you should do it.”
Unemployment peaked at 14.8 percent during the pandemic, and Congress extended unemployment benefits at different times during the last year. Under the American Rescue Plan when filing individually, $10,200 of unemployment benefits are nontaxable as long as your gross income was less than $150,000.
For couples filing together, the total amount between them is $20,400.
“If you’re filing together on a joint return, you both can claim up to $10,200, assuming you both received that. So let’s say that maybe the taxpayer received $15,000, but the spouse only received $5,000. The one cannot claim more to compensate for the other. It’s $10,200 for each. So the one that got $5,000, sorry we can’t compensate on the other one to make up for it.”
But there is one caveat, Collins said. In order for unemployment benefits to not be subject to taxes, your modified adjusted gross income, has to be less than $150,000. “If it’s over $150,000, there is no phase-out period. 100 percent of what you receive for unemployment is taxable. So if you’re under $150,000, you can both exclude up to $10,200 filing a joint return. And the $150,000 limit is regardless of what filing status you’re using — if you’re single, $150,000, married filing joint $150,000, separate $150,000, it’s all the same,” she said.
The IRS gave this guidance on March 31, but it is retroactive. So if you filed your taxes before March 31, the IRS will calculate and determine if you will get a refund.
Home office deductions
If you get a W-2, the cost of upgrading your kitchen table to a home office during the pandemic is all on you, says Collins.
“So even though you’ve had to set yourself up at home with a desk, supplies — whatever you had to purchase out of pocket —you get no deduction for that on your tax return. Hopefully your employer has some type of reimbursement plan where they’re helping you out.”
For self-employed individuals or independent contractors, though, there are a couple of ways to handle home office deductions. One option is a simple deduction based on the square footage of your office.
But there is one big caveat to this strategy. “Let’s say you decide to take the simplified method and you already have a loss on your business, you cannot use that home office deduction to make your loss larger. It’s basically lost,” she said.
If you did have a business loss this year, Collins says tracking expenses in detail could help you out on next year’s taxes.
“You can’t use it this year to make the loss bigger, but you can carry it forward to use it in another year when your business makes money.”
On March 20, 2020 Education Department-owned student federal loan payments were paused and interest stopped accruing. On March 30, 2021 federal student loans made through the Federal Family Education Loan Program that were in default were also paused.
“So where some folks would probably take out a larger student loan interest deduction, they might not have as large of one now because they’re not making the payments,” said Collins.
If you turned a hobby into a side business or picked up temporary gig work, it could affect your taxes. Collins says the first step is to determine if it stayed a hobby or became a business.
For example, some individuals have turned to social media to earn money as influencers, she said. “They’re completely outfitting their office, incurring all kinds of expenses, and they’re earning money by doing this. Somebody’s paying them advertising money. They are running a business. So even though it’s fun, they’re making money, and it should be reported on a Schedule C. So I think a lot of folks may not even be aware that they’re in a business capacity or that they wouldn’t even know that they have a filing requirement or to know what is reportable for income or expenses.”
The IRS extended the filing deadline to May 17, 2021.