The 2021 tax season gets underway next Friday, and taxpayers will see some changes ushered in by the coronavirus pandemic that could affect their returns.
Experts say people should be aware of certain situations, including working in a different state or claiming a stimulus payment, that could affect their tax liability.
Here’s what you need to know:
Are stimulus checks taxable?
No. Anyone who qualified but didn’t receive a payment can claim the amount as a credit on their 2020 federal return. Tax experts say some people might be able to receive a larger tax refund if they were shortchanged on their stimulus payments.
In the first round of stimulus payments last spring, the IRS used 2019 tax returns to determine eligibility in most cases, so those who ended up earning less in 2020 could be eligible for more, said Jason Katz, a wealth management adviser for Bartlett Wealth Management.
New parents who had a child last year and report it on their 2020 return might receive a higher tax refund or see their tax liability shrink. Taxpayers who received a higher stimulus payment than they should have based on their 2020 income aren’t liable to pay it back to the IRS, Katz said.
In the first round of stimulus payments, individuals earning less than $75,000 in adjusted gross income qualified for the full $1,200 payment, and married couples filing a joint return with income of less than $150,000 qualified for $2,400. The federal government offered $500 per dependent child to certain taxpayers. People who made more qualified for smaller amounts, and it was phased out for individuals whose income exceeded $99,000 or $198,000 for joint filers with no children.
The second round of stimulus payments covered more people, including mixed-immigration status families. The payments were reduced to $600 for individuals and $1,200 for joint filers. The payments were reduced and then phased out for individuals making more than $87,000 and $174,000 for couples with no children.
What if I worked remotely from another state?
People who spent part of last year working from a vacation home in another state might owe income taxes there, too, but the answer depends on the state.
“It could be very complicated this year. The more states people have been at and working could be an issue,” said Eileen Sherr, director of tax policy at the American Institute of Certified Public Accountants.
A few states, like Washington, Texas and Florida, don’t have personal income taxes, but almost every other state that does will impose them on nonresidents working remotely from that state after a certain number of days.
Illinois residents catch a break here.
The state has reciprocity agreements with Wisconsin, Michigan, Kentucky and Iowa that prevents Illinois residents from having to pay income tax in those states. For people working in states other than those, Illinois offers a tax credit to reduce double taxation.
In light of the growing number of people working in different states, a group of states have offered some guidance to remote workers. Fifteen states and the District of Columbia said they temporarily won’t enforce their tax rules on out-of-state residents working in their state remotely because of the pandemic, according to the American Institute of CPAs.
How will a state know if I worked from there?
There are several ways. First, employers might withhold taxes for employees working in a different state. Tax preparers will ask clients when helping them file a return. The IRS could audit the individual and ask for credit card bills, phone records or car registrations, Sherr said.
Can I write off my work-from-home expenses?
No. The Tax Cuts and Jobs Act, which took effect in 2018, eliminated the ability of employees who receive a W-2 from their employer to deduct home office expenses.
However, Illinois law requires employers to reimburse workers for necessary expenses that are within the scope of their employment and benefit the employer. Companies don’t need to reimburse workers for expenses that were the employee’s fault, normal wear and tear on items they use for work, or theft.
What if I’m self-employed?
The self-employed and small-business owners might be able to deduct home office expenses if they meet two requirements.
One, taxpayers must regularly use their home office exclusively for work and not for any other purpose, and two, it must be the main place where the individual conducts his or her business.
The rise of remote work has opened the possibility of self-employed people who typically run their business from an office but have shifted operations to their home to claim the home office deduction.
“Most peoples’ principal place of business didn’t exist during COVID. A self-employed business owner would be able to possibly make the claim that their home office served as their principal place of business during 2020,” said Steven Savoy, an accounting professor at the University of Illinois at Chicago.
Those taxpayers can use two calculations to deduct a portion of their expenses, including utility bills, mortgage interest, depreciation, rent or office supplies. The first calculation uses the percentage of the home office space relative to the entire area of the home. The second involves multiplying $5 by the area of the home used as an office, which is limited to 300 square feet.
Are my unemployment benefits taxable?
Yes. The income people received from unemployment benefits, including from federal pandemic relief programs, is taxable at both the state and federal level, said Kristin Richards, acting director of the Illinois Department of Employment Security.
Anyone who received jobless benefits in 2020 will be sent a 1099-G form, which contains the amount of benefits paid out and any taxes withheld. The department said it sent out the form in late January, using the contact method the individual provided.
Richards said people who didn’t apply for benefits but received the form should immediately contact the Illinois Department of Employment Security at 800-244-5631, because they might be a victim of unemployment fraud.
In Washington state, taxpayers with questions about fraud and the 1099-G forms can go to the Employment Security Department website’s “Tax Info for Fraud Victims” page for information.
Taxpayers who didn’t apply for benefits can request a corrected form, according to the IRS. Anyone who doesn’t receive a corrected form before April 15 should still file an accurate return listing only the income they received, the agency said.
Though it’s too late to change the election for tax withholding, experts say benefit recipients can avoid owing taxes next year by choosing to have taxes withheld from their unemployment check.
What else should I know?
In the pandemic relief package enacted last spring, a special provision temporarily suspended limits on charitable contributions, allowing taxpayers to deduct up to $300, regardless of whether deductions are itemized.
Donations must be to charitable organizations with tax-exempt status that are eligible to receive tax-deductible contributions. That includes churches, charities, nonprofit schools, hospitals, volunteer fire departments, and certain cultural groups. The IRS has an online search tool to help determine an organization’s charitable status.