By Tom Wheelwright, CPA
If you have more questions than usual regarding your taxes, you’re not alone. The effects of the coronavirus pandemic and the relief provided by the government has brought more change to this tax season than ever before. Here are a few ways your taxes may be impacted this year.
If you were one of the more than 1.6 million Arizonans collecting unemployment in 2020, you may be facing a large tax bill. When you receive unemployment, you have the choice to have taxes withheld from each payment or pay a lump sum of taxes on your return. If you chose not to have taxes withheld from your benefits and haven’t made any quarterly payments, you’ll need to pay the lump sum when you file your taxes. Additionally, if you had unemployment and did withhold, you may still owe tax if your spouse had a good paying job, so don’t assume that you don’t owe taxes for unemployment just because you withheld. If you can’t afford to pay the total when you file your taxes, you can request a 120-day extension from the IRS and make payments during that time frame.
Economic Impact Payment
The economic impact payment is considered a refundable tax credit, which means it does not count as taxable income. This means that the payment will have no effect on your refund or what you owe on your 2020 tax return. However, if you have not received the latest stimulus check or haven’t received the full amount you’re eligible for, you can claim the Recovery Rebate Credit to get the funds you’re owed. One thing to consider is the time you choose to file your taxes because it could either hurt or help your next economic impact payment that’s set to be approved in the next stimulus bill. Depending on where your income fell for 2020, if your income was higher than 2019, you may want to wait to file until after you receive your next check.
Withdraws from 401(k)
The CARES Act allowed taxpayers to withdraw up to $100,000 from 401(k)s and the 10% penalty was waived for 2020. If you decided to withdraw from your account, the money you withdrew will be taxed as ordinary income, so you will need to plan accordingly. Again, if you find yourself in a position that you can’t afford to pay the full amount of your tax bill, contact the IRS to file a payment extension and create a payment plan. However, you have three years to put those funds back and get a refund on any taxes you paid on that money or you can elect to spread the income over 3 years and be taxed in 2020, 2021 and 2022.
Home Office Deduction
Many people worked from home during the pandemic, so you may be wondering if that qualifies you for the home office deduction. For most taxpayers the answer will be no. If you receive a W-2, you cannot deduct your home office as this deduction is only available to business owners or independent contractors. If you do qualify for this deduction there are quite a few allowable home office expenses include utilities, mortgage interest, property taxes, homeowners and liability insurance, repairs and maintenance of office area and depreciation of office area. To make this deduction, the desk or table you work from must be uniquely used for business. If you have a small area set aside in your home used regularly and exclusively for specific administrative or management activities, it can also be deductible, but there must be no other place of business where you conduct those activities.
This tax season will certainly be different that years past, but planning ahead for potential expenses and understanding the changes will set you up for success.
Tom Wheelwright is a CPA, CEO of WealthAbility®, Best-Selling Author of Tax-Free Wealth (Rich Dad Advisors Series), Speaker, Entrepreneur and Host of 2 popular podcasts: The WealthAbility® Show with Tom Wheelwright CPA and The WealthAbility® for CPAs Show.