Well, here we are, amidst another tax season. Except this time, we have a slew of new tax law changes and additions in response to a global pandemic we’re still coping with! From PPP and EIDL loans offered by the SBA, to utilizing a home office deduction, leveraging your retirement plans, and more, we want to share tips and tricks to help you take full advantage of the tax saving tools available as you prepare to file your 2020 income taxes and plan your tax strategy for 2021.
Here is a brief summary to help you sort everything out with ease.
It DID get extended to May 17th. But wait, not so fast! The 1st quarter estimated tax payment for this current 2021 tax year is STILL DUE ON 4/15/2021. There is a work around, just ask your CPA. Also, not all of the states have extended, so watch out for state filing requirements.
AKA stimulus checks received in 2020 and/or 2021 are not taxable income. If you did not receive your checks, there is a schedule that will allow you to receive them when you file your return.
Much, if not all of your federal and many state’s unemployment compensation is no longer taxable. But your Form 1099-G will show the unemployment compensation you received as being taxable. Make sure that your software or preparer know how to only report the taxable amount. Don’t worry, if you have already filed your 2020 return and paid income tax on your unemployment, the IRS just announced that they will be going back and automatically adjusting your return and sending you the money you would have received.
Most taxpayers take the standard deduction instead of trying to itemize. For 2020 and 2021, you can still deduct up to $300 in charitable cash donations you donated to qualified charities in 2020 even if you don’t itemize. Teachers can also deduct up to $250 for COVID-19-related supplies and other qualifying expenses without itemizing.
If you are able to itemize, you may have more medical expenses than you realize. Medical expenses are deductible to the extent they exceed 7.5% of your adjusted gross income. If caring for family members in your home, they may be your “medical dependent” and you can deduct medical expenses incurred for them. A medical dependent is someone for whom you provide over 50% of their support. You may also qualify for the dependent care credit. And, just recently, the IRS announced that COVID related PPE (Personal Protective Equipment) is deductible as part of your medical expenses. This includes items like masks, shields, hand sanitizers, gloves and sanitizing wipes.
For those who itemize, mortgage insurance premium deductions are extended by one year and the limit on cash contributions to charities was increased to 100% of the individual’s adjusted gross income in 2020 and 2021.
For “gig” economy or self-employed workers, report your income and expenses on Schedule C of Form 1040. Net income will be taxable to you regardless of whether you withdraw cash from the business. Business expenses will be deductible against gross income and not as itemized deductions.
If your business generated qualified business income, you may be eligible for the 20% pass-through deduction. If you worked from a home office or stored inventory in your home, you may be entitled to deduct certain home maintenance costs.
Consider establishing a qualified retirement plan. The SECURE Act made it very affordable. Plans such as a simplified employee pension (SEP), solo 401(k) and “savings incentive match plan for employees,” (SIMPLE) allow contributions to be deductible and considered income only when money is withdrawn. Even without establishing a retirement plan, you may still contribute to an IRA.
Distributions from your retirement plan may not be taxable and you may not owe penalties for early withdrawal if it was a “qualified disaster distribution” up to $100,000 from an eligible plan. And if you meet certain COVID requirements, you can file a schedule that will remove the penalty as well as allow you to spread the income over the next 3 years instead of being taxed on all of it in one year.
For 2020, you’ll pay self-employment tax at 15.3% on net earnings up to $137,700, and Medicare tax at 2.9% on the excess. This is in addition to income tax, but half of it can be deducted. Health insurance premiums for you and your family may be 100% deductible. Expenses for insurance, automobile, travel, meals, home office and others are subject to special recordkeeping requirements or limitations.
For taxpaying parents, you are eligible for a refundable credit if your child tax credit (CTC) exceeds your tax liability. To determine the amount, you can substitute the earned income from 2019 instead of 2020.