As a tax-savvy financial advisor, tax season (like the Roman Empire) is divided into two parts. Part one is ‘tax planning season’—an ongoing process in which we develop multi-year strategies to minimize lifetime taxes. Part two is ‘tax filing season’ in which we focus on tax compliance. This part consists of gathering data, completing forms, and calculating prior year income and deductions, and then submitting completed tax returns to the authorities.
As we move into tax filing season, here are some good things you should know:
- Tax season officially begins on February 12.
Following the unprecedented change of the due date for taxes last spring, this year brings another first: the official start of tax season is taking place two weeks later than normal, with the IRS opening its doors to returns on February 12. The reason? The relief bills and other changes required the IRS to rework many of its forms, which, in turn, required tax software providers to update content in their databases. That all required time. Note, however, that despite the small delay, there is no extension of the due date this year: personal taxes must be completed by April 15.
- Required Minimum Distributions (RMDs) were waived in 2020.
This piece of the CARES Act was a nice benefit for retirees who didn’t need distributions for income, but it sure caused confusion from a tax perspective. The announcement came in late March, soon after many people had already taken their first RMD for the year, but there was the option to return the money received and, ultimately, avoid paying taxes on that lump sum. The catch: the IRS had no way to record returned RMDs, so I’ve had many clients asking why they received a Form 1099 for funds they returned. Don’t fret: the new tax forms include a way to rectify the issue—we will simply check the correct box and subtract the amount of the RMD from your adjusted gross income (AGI). Consider it done.
- You may still receive a 2020 stimulus check—even if you didn’t get it yet.
The CARES Act and the December stimulus bill both provided stimulus checks to taxpayers who qualified based on their 2018 or 2019 tax returns. In short, if your AGI was below $75,000 for singles or $150,000 for couples, you should have received a payment. If you did receive a check, you should have also received an IRS Notice 1444 in the mail (this must be provided to your tax preparer for this year’s return, so please watch for it). If you didn’t qualify based on your 2018 or 2019 returns, here’s the good news: if your income dropped to the required level in 2020, your stimulus will be added to the bottom line on your 2020 tax return. If you have dependent children, you will also receive $500 per child from the CARES Act and $600 per child from the December stimulus bill. Even better, if you received funds based on your older tax return but your income rose above the mandated levels in 2020, the IRS is not requiring these funds to be paid back. Cheers to that!
- Forgiven PPP loans won’t be taxed, and covered business expenses will be deductible.
The Paycheck Protection Program (PPP) helped many small businesses stay afloat in 2020, providing funds to bolster payrolls and, ultimately, keep people employed. The funds could also be used to cover expenses such as rent, utilities, and other key operational expenses. The downside was that the treasury said that if PPP money was used to pay business expenses, those expenses would not be deductions from income—effectively taxing PPP money. Thankfully, Congress reversed the treasury interpretation in the December stimulus bill, so business expenses paid with PPP funds are fully deductible.
- Charitable givers will see an extra perk.
The CARES Act put temporary amendments into place to encourage people to give generously in 2020. Under the 2017 Tax Cuts and Jobs Act (TCJA), charitable contributions could only be deducted by taxpayers who itemized their deductions (which ruled out many). In 2020, you can take an above-the-line deduction of up to $300 (for singles) or $600 (for couples) for cash donations to qualified charities—even if you don’t itemize. For those who give much more, the CARES Act also extended the limit on charitable contributions to 100% of your AGI. In both cases, givers will be rewarded more than usual come tax day.
- If you received unemployment benefits, they won’t be taxed by California.
That’s the good news. The not-so-good news is that unemployment insurance compensation—including the expanded benefits that were part of the relief bills—is taxable on your federal return. Even if you elected to have taxes withheld from each check, that withholding may not be enough to cover your total tax liability. My best advice to unemployment recipients is to complete your tax return as soon as possible so you can be prepared to write a check on April 15.
- Your home office expenses can be deducted—but at the state level only.
While it’s true that only self-employed workers can deduct home office expenses from their Federal income taxes, certain states, including California, allow employees to deduct unreimbursed business expenses from their state taxes. (The other states that offer this tax break are Alabama, Arkansas, Hawaii, Minnesota, New York, and Pennsylvania.) So if, like many, you’ve been forced to work from home during the pandemic, hang on to those receipts for that new home-office chair, ergonomic keyboard, or desk monitor! If you live in the ‘right’ state, we can count these as deductions on your state tax return.
So, there is some good news as we head into tax filing season. Despite the promise of the Tax Cuts and Jobs Act to simplify the tax preparation process, tax preparation is more complex than ever. To take advantage of the tax perks of 2020, consider working with a qualified tax advisor to manage the details.
As a tax preparer I help you comply with the law, maintain good records, and file and pay taxes on time. But as a tax-focused financial advisor, I can devise multi-year strategies to help maximize your wealth. Tax planning is where the magic can happen. No one can predict what changes may come under the Biden Administration, but trust that I will be keeping a close eye on any changes and the potential impact on your personal tax situation. If you have any questions along the way, please reach out. As always, I am here to help!