Here's why your taxes may be so much harder this year
While taxpayers have an extra month to file their federal returns, the disruptions caused by the pandemic along with new stimulus provisions still make this filing season more complicated.
Some of those reasons include how unemployment benefits are taxed, confusion over state taxation for remote workers, claiming your stimulus payments, and calculating certain tax credits.
Read more: Taxes 2021: How to avoid scams this filing season
"There were a lot of events that occurred this season," Lisa Greene Lewis, a tax expert with TurboTax told Yahoo Money. "Whether you were unemployed, over 40 million were unemployed or a lot of people worked from home, people have questions if they were an employee and they work from home, are they able to deduct their work from home expenses."
This year, the filing season opened on February 12, a delayed start compared with previous years, leaving Americans with less time this season to prepare their returns. Now, the initial April 15 deadline has been pushed to May 17, giving Americans a month longer to work on their taxes.
With millions of Americans receiving unemployment benefits in 2020, how those benefits are taxed just got more complex.
Unemployment benefits are subject to federal income taxes and potentially state income taxes if you don't live in one of the states that don’t impose income taxes at all or one that doesn't tax unemployment benefits. If you didn't have those taxes withheld from your jobless benefits payments, you may end up owing taxes.
“People receiving unemployment benefits are hard on cash and don't put aside the money for the unemployment income,” Lewis Taub, a certified public accountant and New York director of tax services at Berkowitz Pollack Brant Advisors, told Yahoo Money. “They do get hit unexpectedly hard when they actually have to pay their tax bill.”
Read more: Here's how you should use your tax refund in 2021
But under the new $1.9 trillion stimulus deal, the first $10,200 in unemployment benefits aren't taxed on the federal level for eligible filers. The newly added tax exemption applies to the 2020 tax year and for households making up to $150,000.
Fortunately, taxpayers who filed their federal returns already and didn't take the $10,200 tax exemption on unemployment benefits don't have to amend their return, according to the commissioner of the IRS. If you're owed money from the federal government because of the exemption, then the IRS will send you a second refund for the difference.
The break increases a taxpayer's refund by about $1,000 or reduces their tax liability by the same amount, according to estimates from Andrew Stettner, an unemployment insurance expert and senior fellow at the Century Foundation.
People who got unemployment benefits in 2020 should have a Form 1099-G from their state. A lot of states don’t mail the form, so taxpayers should go to their state website to access the form.
Working from home
If you are one of the many workers who spent most of 2020 working from your home rather than an office, you may be wonderingwhat you can deduct on your tax return. It depends on your working status.
Regular employees of companies can't deduct any expenses they incurred for their work-from-home office. That's because the Tax Cut and Jobs Act signed into law in 2017 eliminated the unreimbursed business expense deduction. But several states — including Alabama, Arkansas, California, Hawaii, Minnesota, New York, and Pennsylvania — do offer a deduction for unreimbursed employee business expenses on their state returns.
Self-employed workers, however, can deduct expenses related to their business from self-employment income on Schedule C or Schedule F. They can also take a home office deduction for a space used exclusively for business. They may also write off some utility expenses, taxes, insurance, repair, and depreciation.
Read more: Here's what to do if you haven't gotten your stimulus check
If you also worked from a different state for more than 183 days, you may be taxed in a different state, according to Greene Lewis.
"They may have taxes if they earn money in two states, or worked in a different state, but a lot of states have reciprocal agreements where you're not taxed, double," she said.
How states are taxing workers who worked from home in a state that's different from their office remains unresolved for some states.
For example, New Hampshire sued Massachusetts after the state required New Hampshire residents to pay Massachusetts income taxes if they normally commuted to the state to work before the pandemic. The case is headed to the Supreme Court and the ruling could affect other states like New York and New Jersey.
Taxpayers who qualify for a stimulus payment but didn't receive one or didn't get the full amount can claim them using the newly added Recovery Rebate Credit on their federal tax return.
The credit applies to both the first round of $1,200 stimulus checks sent in the spring and the second round of $600 checks sent in January. It doesn't apply to the third round of the $1,400 stimulus checks that are currently being sent out. That one can be claimed on your 2021 tax return.
Taxpayers who had significant life changes may also want to look into the credit.
For instance, parents who welcomed a baby in 2019 or 2020 may be able to claim the additional money available for dependents. College students and other young adults may be eligible for the payments if their parents don't claim them as a dependent on this year's tax returns.
A change in income could also be a reason to claim the credit. For example, if you lost your job or experienced an income drop in 2020, you may be eligible for the payment or a bigger check than the one you got. If you were eligible but never received your payment because you changed your address or the IRS didn't have your bank information on file, you can also claim the credit.
If you’ve received a payment but want to claim a higher amount, you need to list the amount shown on your Notice 1444 and include it when completing tax documents Form 1040 or Form 1040-SR. You should’ve received Notice 1444-A for the first payment and Notice 1444-B for the second one in the mail.
The 'look back rule'
This year, taxpayers are allowed to use either their 2019 or 2020 income to determine eligibility for the Child Tax Credit (CTC) and the Earned Income Tax Credit (EITC). To qualify for the credits, you must have earned income in 2020; unemployment benefits don't qualify.
The CTC this year provides a credit of up to $3,000 per child under 18 — and $3,600 for children under 6 — for qualifying families. Also this year, childless workers could claim the EITC starting at age 19 — instead of 25 — except for some full-time students. The age limit of 65 would be eliminated, too. These workers would also get about three times more from the credit, around $1,500 from $530.
Choosing the year with higher income does not necessarily give you a bigger credit, so calculate the credit under the different incomes and use the one that provides the best credit. The credit may not just reduce your tax liability, it could also increase your refund.
"They're refundable credits," Taub said. "Not only they'll reduce your dollar-for-dollar taxes, but if your credit exceeds your tax liability, up to a certain amount, the IRS will refund you that amount."
Denitsa is a writer for Yahoo Finance and Cashay, a new personal finance website. Follow her on Twitter @denitsa_tsekova
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