Multiple tax changes in store for 2020 filers
Many people created workspaces — at their own cost — in their homes last year if they were no longer going to an office to work, and some may be wondering if they’ll get a tax break on setting up their home office.
“Unfortunately, no,” said Alex Kindler, a partner at H2R CPA in Green Tree, Pa.
“If you’re an employee who telecommutes, there are strict rules that govern whether you can deduct home office expense,” he said.
In other words, you won’t be deducting the cost of those chairs, computer desks and printers you bought for your workspace last year, unless you were a business owner or a self-employed contractor.
As the 2020 tax season gets underway, tax preparers say their clients want to know how their taxes will affected by the COVID-19 crisis.
Those fortunate enough to have kept working and getting paid during the pandemic will not see a whole lot of difference in their individual tax returns this year compared to last year.
But the pandemic forced millions of people to find different ways of making ends meet, which included taking on temporary jobs, joining the gig economy and even being creative enough to do something like make and sell masks to bring in extra cash.
The good news is stimulus money from Uncle Sam isn’t taxable, but all other sources of incomes should be reported to the IRS and they could affect an individual’s tax bill. That’s why taxpayers working as independent contractors should keep records of income and all expenses related to the work, such as the miles they drove.
Because of the pandemic, this year the Internal Revenue Service is allowing taxpayers to write off an additional $300 in deductions for charitable gifting over and above the standard deduction. The majority of taxpayers take the standard deduction. The 2020 standard deduction for single tax filers is $12,400. For married couple it’s $24,800.
The federal government also has offered a lifeline for low-income workers who suffered financial setbacks due to the coronavirus.
People who earned less money in 2020 than than they did in 2019 will be allowed to use their 2019 income — if it’s more advantageous — in order to receive a larger earned income tax credit or child tax credit.
The credits mostly benefit low-income workers. The tax credits could range from $538 to $6,660 depending on the taxpayer’s filing status and the number of children in the household. A single head of household earning $50,954 with three or more children could receive the maximum tax credit.
“The earned income tax credit is based on earned income. Unemployment income doesn’t count. This rule change helps people who had earned income in 2019, but lost a job last year,” said Howard Davis, president of the Davis, Davis &Associates accounting firm in the Strip District.
“They can use the 2019 income and get a tax credit, which likely could result in a refund,” Davis said. “It’s a refundable credit. Even if they owe no tax, they can get money back.”
He said the Internal Revenue Service also gave seniors and retirees a tax break last year by allowing them to skip making required annual withdrawals from their taxable retirement accounts, such as 401ks and traditional IRAs.
The waiver also applies to anyone who inherited an IRA and those who turned age 70½ in 2019 and would have needed to take their first taxable withdrawal in 2020.
“We recommended all of our clients to not take the distribution if they didn’t need it to live on,” Davis said. “Then, they don’t have to pay taxes on what they take out and 100 percent of that distribution is still working for them, and it’s still tax deferred.”
Under the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, taxpayers could take up to $100,000 in coronavirus-related distributions from retirement plans without being subject to the 10 percent additional tax for early distributions if the account owner is younger than 59½.
To qualify, the taxpayer, a spouse or dependent must have been diagnosed with COVID-19 or experienced an adverse financial consequence from reduced income or inability to work due to lack of child care.
The CARES Act also lets taxpayers who need a retirement account withdrawal to spread the tax payments over three years or pay the whole tax bill the first year. This helps reduce the tax burden for the current year and shift it to the following years, if necessary.