Good news: The government won't tax your stimulus payment.
Bad news: You can't claim business deductions related to working at home for your employer.
Just when it seemed 2020 was fading in the rearview mirror, we have to revisit the jinxed year when filling out our income tax returns. The unprecedented events of last year have created some first-time questions.
Julie Wood, a certified public accountant and owner of Witmer Wood Tax Consultants, and Karen Johnson, a CPA who works in the Leo-Cedarville firm, answered some common questions clients have this year.
Many want to know whether they have to pay taxes on the federal coronavirus relief payments paid to taxpayers with incomes below a certain level.
Even though the payments aren't taxable, preparers need to make sure filers have received the amount due to them – no more, no less.
'A world of hurt'
Stimulus payment amounts were based on the number of dependents declared on 2019 tax forms, but some families gained or lost a family member in 2020, which would make the amount paid incorrect.
Those who didn't receive enough money can deduct what they were owed from any taxes due – or even add the amount to a requested refund. Anyone who received too much in stimulus funds has to repay it, Wood said.
“That's been the nightmare of our tax season – people are not providing us with the amount they received,” Wood said, adding that one client who swore he and his wife had received $1,200 from the government checked and found the actual amount was $2,400.
Taxpayers who received stimulus payments were supposed to receive Form 1444 and Form 1444B from the federal government by now, but most haven't, including Wood and Johnson.
Wood suggested people can confirm the amount received by referring to bank statements.
“Without that,” Johnson added, “we have to take their word for it.”
Another tip: although the second stimulus payment landed in many taxpayers' checking accounts in 2021, the amount must be included on the form for the 2020 tax year because federal officials approved the payments in 2020, Wood said.
Coronavirus relief funds can also complicate the returns of taxpayers who received unemployment benefits last year – if they failed to have enough money withheld, Johnson said. That's especially true because of the $600 stimulus add-on paid each week.
“If people did not elect any withholding – state and federal – they could be in a world of hurt,” she said. “They could be looking at a potential tax bill.”
Also, don't count on the government giving you a break for working from home.
If your employer has embraced remote working during the pandemic, you might have spent most of 2020 working at your kitchen table or in your home office. But that doesn't mean you can claim a tax deduction for that work space, Johnson said.
“I'm sure we're going to get a lot of people who say, 'Hey, my company made me work at home. What can I write off?' ” she added.
If you bought paper, printer ink or other office supplies, or if you upgraded your internet connection for your job, your employer should have covered that expense, Johnson said. The government doesn't offer tax breaks to offset those bills.
The Trump administration shifted some tax deductions previously available to individuals to their employers in the federal Tax Cuts and Jobs Act of 2017, she said.
Some special breaks are available related to the coronavirus, however.
Anyone who withdrew money from a retirement account for pandemic-related reasons can delay paying taxes on that money for up to three years, Wood said. The government will also forgive the usual 10% penalty for those younger than 591/2, she said.
Wood expects the IRS would consider job loss as an acceptable explanation for needing retirement funds early.
As Wood and Johnson settle into their busy season of tax preparation, they took time to reflect on next year's tax season.
It's anyone's guess, they said, which tax laws might change under the Biden administration.