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A unique tax season
Filing your 2020 tax returns could be different from previous years because of some changes and circumstances related to the coronavirus pandemic.
NEW YORK - The coronavirus pandemic triggered many changes in the U.S. economy and the employment landscape. Many U.S. residents lost their jobs, some transitioned into the so-called gig economy, and others shifted to working from home. Taxpayers may have cashed unemployment checks and/or received money due to the federal pandemic relief packages. And, sadly, many Americans got sick and incurred unforeseen medical bills.
These situations will affect you come tax season. Here are some important facts to know before you file your federal tax returns.
1. The IRS tax season starts on Friday, Feb. 12, 2021.
That February start date is about three weeks later than in past years. So why the delay? The IRS needs more time to program and test its systems after the changes that Congress made to the tax law on Dec. 27 that provided another round of Economic Impact Payments and other benefits. IRS Commissioner Chuck Rettig called this a "massive undertaking."
"Given the pandemic, this is one of the nation's most important filing seasons ever," Rettig said in a statement. "This start date will ensure that people get their needed tax refunds quickly while also making sure they receive any remaining stimulus payments they are eligible for as quickly as possible."
2. The IRS is taking longer than usual to process paper returns. So e-file instead.
The agency is urging taxpayers to file their tax returns electronically and to choose direct deposit to receive refunds.
"Direct deposit means any tax refund is electronically deposited for free into a taxpayer's financial account," the IRS states. "Eight out of 10 taxpayers get their refunds by using direct deposit. It is simple, safe and secure."
3. File your tax returns as soon as you can.
The IRS states that despite its Feb. 12 start date, you can file your returns immediately with tax software companies, including IRS Free File partners. These companies, which are already accepting returns, will zap your returns to the IRS beginning on Feb. 12 and to your state's tax department now.
Financial planner Shaun Roberts told FOX 5 NY that this will be an unusually busy tax-filing season for taxpayers, tax preparers, and the IRS.
"It's very, very important to get on it early," he said. And here is one reason why:
4. You may owe taxes on your unemployment checks.
"A lot of people have collected unemployment and didn't have it taxed properly and they may wind up in a position where they owe," Roberts said. If you file early, you can get a payment plan set up if you need one as soon as possible and get that debt off your shoulders.
"Millions of Americans received unemployment compensation in 2020, many of them for the first time," the IRS states. "This compensation is taxable and must be included as gross income on their tax return."
5. You don't need to pay taxes on the pandemic stimulus payments.
The Tax Institute's Garrett Watson said those checks and direct deposits do not count as taxable income.
"The stimulus payments are considered a tax credit on your tax return so you won't have to pay any tax on either prior stimulus payments that were made or any additional amount that you'll be able to receive," Watson said.
6. If you work from home, you may or may not be able to deduct your work-related expenses.
If the pandemic prompted your employer to send you home to work from there, you may be wondering about the home office deduction. Unfortunately, you can't deduct any work expenses that you incur at home if you're still an employee on your company's payroll.
The home office deduction only applies to taxpayers who are self-employed — such as freelancers, consultants, entrepreneurs, gig workers, and other types of independent contractors.
"If you are self-employed and you moved into a home-office environment, you should look into potentially deducting those expenses, if you haven't already before, because you can do that under certain limitations," Watson said.
You can read the fine print here: Business Use of Your Home (IRS Publication 587).
7. Deducting medical expenses, including anything related to COVID, depends on a few things.
If you itemize your deductions, you can deduct only those eligible medical and dental expenses that exceed 7.5% of your adjusted gross income. So you should carefully go over the numbers with a tax preparer, tax software, or another resource.
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You can find more details and guidance from this IRS document: Important reminders before filing 2020 tax returns. Also, be sure to look over these IRS tax tips.
Many New York City residents can get free help with preparing and filing their taxes. You can find out if you're eligible for these programs here.
Read more articles about personal finance here.