This year has proved to be the gift that just keeps on giving.
While the world continues to surprise us day in and day out, the last thing any of us would want is a surprise on our tax return at filing time in the spring. In an effort to alleviate as much financial uncertainty as possible, allow us to address a few common questions likely to be on the minds of readers as we all adjust to life in the ‘new normal’.
Are there tax breaks for working from home or paying for childcare?
While the IRS has provided an abundance of beneficial legislation for American workers, unreimbursed work-from-home expenses are, unfortunately, not tax deductible in 2020. Self-employed individuals may take deductions for such expenses, but not the typical worker.
Likewise, no deductions or tax credits are available for home-schooling expenses at the federal level. Certain states such as Illinois, Louisiana, and Minnesota have provided tax breaks at the state level for home-schooling expenses; however, that provides no assistance for taxpayers in the other 47 states.
The Child and Dependent Care Credit is a tax credit that helps working families who pay out-of-pocket expenses for childcare. A taxpayer may claim the credit if he or she paid someone to care for a child under the age of 13, subject to certain limitations. Included in these limitations are phase-outs based on household income, a credit ceiling, and qualification rules for eligible expenses. Nevertheless, the maximum tax credit just for paying childcare is $2,100; thus, it is recommended that you consult a tax professional in order to determine your Child and Dependent Care Credit eligibility along with other tax breaks available in 2020.
Are stimulus checks and unemployment benefits taxable?
The stimulus checks millions received this year are not taxable. It does not increase your taxable income nor will it decrease your potential tax refund.
On the other hand, unemployment benefits received do not face such treatment as taxes on these benefits are, in fact, taxable. One option for reporting unemployment compensation is for the taxpayer to have tax withheld from the benefits now to help avoid owing taxes on this income when filing their federal income tax return next year. Of course, withholding is voluntary. Federal law provides the option for recipients of unemployment benefits to instead have a flat 10% withheld from their benefits to cover part or all of their tax liability. Further, if a recipient does not choose withholding, they can make quarterly estimated tax payments instead.
What if I worked remotely in two different states during the year?
State taxation is generally based on how long a worker is there, what income is earned, and where the worker’s true home is. So, does setting up a desk at your out-of-state vacation home obligate you to pay income taxes there? It depends. Historically, twenty-four of the fifty states require income tax payments if you worked within their borders for just one day. In light of the pandemic, some state revenue departments have vowed not to tax workers who have moved to another state temporarily, while others have stated they will not be quite as lenient. With tax law varying so widely from state to state and further pandemic-related complications arising on a regular basis, it is best to consult your tax preparer when considering multistate tax reporting this year.
As business owners, workers, and their families adjust to today’s world, there are important decisions to make and crucial financial factors to weigh. If you have not begun to consider the effects of COVID-19 on your 2020 tax return, hopefully the topics above act as a catalyst to get the wheels turning. It is never too early to pick up the phone and speak with your CPA about the impact of the pandemic on your financial wellbeing.