Back to Basics: Tax Season Opens

As the “Meme-Stock Bubble” (GameStock! AMC! Silver!) saga continues to unfold, it’s time to get back to basics. In the category of “We Like Good News Too,” the Congressional Budget Office said it expects the economy to return to its pre-pandemic level by the middle of this year, in large part due to government spending in 2020. Before you get your roaring twenties hats out, CBO cautions that economic activity will be sluggish until 2025.

Additionally, just because the size of the economy will get back to where we were a year ago, does not necessarily mean that all of the jobs lost will return on the same timetable. Job growth has tapered off since last summer, and has essentially stalled since cases of COVID-19 spiked after Thanksgiving. The Labor Department reported that January payrolls increased by just 49,000, and the previous two months were revised lower by 159,000.

Unfortunately, the current period of transition, that is, the time between the surge in virus and the widespread vaccination of the public, could be tough for the labor market, which despite progress, will be slow in some areas. CBO predicts that while the unemployment rate should drop to 5.3 percent by the end of this year, the economy is not likely to recapture the 9.9 million jobs lost since the pandemic began, for another three years.

TAX FILING SEASON OPENS

What could be more basic than preparing your taxes? After a tumultuous 2020, the IRS will open tax filing season on Friday, February 12th, a few weeks later than years in the past. The deadline to file and pay any tax owed reverts to April 15th, after last year’s COVID-19 related extension.

By now, you should have received most of your tax preparation documents (W-2s, 1099s, as well as bank, investment, mutual fund and mortgage company documents). If you didn’t learn the lesson of electronic filing last year, this is the year to dump the paper. After all, those who had electronic files with the IRS got those stimulus checks faster than those who had to wait weeks and sometimes months for their money. Additionally, be sure to choose direct deposit, which is “the safest, most accurate and fastest way to get a refund,” according to the IRS.

Stimulus Checks

If you received an Economic Impact Payment of $1,200 ($2,400 if married filing jointly for 2020) plus $500 for each qualifying child you had in 2020), the amount is NOT TAXABLE. However, if you did not receive the payment (or think you were shortchanged on the amount), then focus on Line 30 of the Form 1040 and Form 1040-SR, “the Recovery Rebate Credit.” Even if you did not earn enough income to file a return, you may have to do so to get last year’s credit and also the second payment of $600 ($1,200 if MFJ for 2020) plus $600 for each qualifying child you had in 2020. The credit will then increase any refund you would have otherwise received or lower the amount of income tax you owe.

Unemployment Benefits

The IRS says “unemployment compensation is taxable and must be reported on a 2020 federal income tax return.” That includes all state unemployment benefits, as well as all emergency federal benefits awarded under the CARES Act. You should have received Form 1099-G, which highlights the amount of unemployment that you received.

There are 15 states that do NOT levy taxes on unemployment, including: Alabama, Alaska, California, Florida, Montana Nevada, New Hampshire, New Jersey, Pennsylvania, South Dakota, Tennessee, Texas, Virginia, Washington, and Wyoming. If you don’t live in one of the 15 states listed above, you will also be on the hook for state taxes on your unemployment benefits.

One last warning from the IRS regarding your 1099-G: the agency warns that there’s a big unemployment scam that is dangerous. Thieves are filing fraudulent claims for unemployment compensation, using stolen personal information of individuals who never filed. The fraudsters then pocket the payments made as a result of the falsified claims. You would never know about the scam until after you get a 1099-G and probably say to yourself, “What the heck is this?”

If you have received a Form 1099-G for unemployment benefits for which you never filed, you have to contact the issuing state agency to request a revision that shows you did not receive these benefits. You should also take an easy, extra precaution of requesting an Identity Protection PIN (IP PIN) to protect you against tax related identity theft.  The IP PIN authenticates you as the valid filer of the return.

Interest Income
If you received a refund last year, you may have also gotten a sweetener: interest payments that the agency paid because of the postponed filing deadline of July 15. Those interest payments are taxable to anyone who received at least $10 of interest. The IRS will send a Form 1099-INT so you can report it on your return.

Home Office Deduction 
If you worked from home, you may be looking forward to deducting some portion of your mortgage/rent, utilities, and insurance. NOT SO FAST! The 2017 Tax Cuts and Jobs Act (TCJA) eliminated the employee business expense deduction through December 31, 2025. The IRS says, “Employees who receive a paycheck or a W-2 exclusively from an employer are not eligible for the deduction, even if they are currently working from home.”

That said, if you are self-employed, then the home office deduction is still available. According to the IRS, there are two basic requirements for the taxpayer's home to qualify as a deduction: (1) There must be exclusive use of a portion of the home for conducting business on a regular basis and (2) The home must be the taxpayer's principal place of business.

Telework and Taxes

If you worked from home in a different location than last year, you could see tax benefits, or penalties, for the change in location. The American Institute of CPAs (AICPA) recommends remote workers compile the number of days worked in any states, cities, counties, municipalities, school districts or other jurisdictions you’ve worked remotely in during 2020. Then check your primary state’s rules about other jurisdictions and make the adjustments to tax withholding that are needed.

Earned Income Tax Credit (EITC)
The Earned Income Tax Credit is geared towards low-to-moderate income workers. EITC reduces the amount of tax someone owes, but here’s the cool part: even if you don’t owe any taxes or aren’t required to file a return, you can get the money. The amount of the credit (a maximum of $6,660 for three children or more) is based on whether or not you have kids. To find out if you qualify, use the EITC assistant on IRS.gov.

Charitable Donations

Don’t forget, the CARES Act carved out 2020 as a special year for charitable giving. Previously, you had to itemize deductions to get a tax benefit for giving, but for last year, you can take a charitable deduction of up to $300 for cash contributions made to qualifying charities during 2020 even if you claim the standard deduction. Non-cash items, like clothing, don't qualify for this provision. The $300 limit applies to each return, not to each person.

IRS Free File

The IRS works with a number of tax preparation companies to offer FREE online products for those who make $72,000 or less. There is a hitch: each provider sets its own eligibility rules for products based on age, income and state residency, so you need to do some homework. Go to IRS.gov/FreeFile and use the “Free File Online Look up” tool for help in finding the right product. Once you select it, follow the links to the provider’s website. If you don’t have a computer, Free File products support mobile phone access.

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BlogMark TalercioJill Schlesinger, Jill on Money, tax, taxes, tax season, tax season tips, tax season opens