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Staying home for months on end has taken a toll on everyone, but it can also take a toll on your tax return. Here are five unexpected ways the pandemic could affect your taxes — and what tax pros say you can do about it.
1. Home office headaches
You may already know that living or working in another state could mean having to file more than one state tax return, but working remotely doesn’t mean you automatically get to write off your home office. The home office deduction is typically only for self-employed people. That means if you’re someone’s employee, this tax break is likely a no-go — even if your company sent everyone home because of COVID-19, and even if your company didn’t reimburse you for that office chair, printer or paper you bought, says Dina Pyron, the Global TaxChat Leader at Ernst & Young LLP.
“I honestly think that people are going to try to do that,” Pyron says, referring to claiming the deduction. “And that will bring a lot of kickback potentially on a return.”
2. Unemployment upheaval
Stimulus checks aren’t taxable, but unemployment income is. That information alone may startle many taxpayers, but the surprises don’t stop there, warns Ryan Losi, a certified public accountant and executive vice president at Piascik Certified Public Accountants in Glen Allen, Virginia.
In addition to the IRS, your state may or may not also tax unemployment, he says. Also, receiving unemployment could affect the size of the premium tax credit you may qualify for when you purchase certain types of health insurance. “All of a sudden, now they have more household income; they qualify for less advance credit,” Losi explains.
Another potential shocker: Criminals using stolen identities file for unemployment but have the state send records of the payments (Form 1099-G) to the mailbox of the real taxpayers, who are left with the headache of convincing the IRS the income wasn’t real. That means spending time figuring out how to report the problem, deal with your tax return and provide the IRS with documentation, Pyron notes. “You also have to make sure you're checking your mail and you're making sure that you are not just ignoring documents you get in the mail, because if you get an erroneous 1099-G, you've got to report that to the state.”
3. Dependent difficulties
Some single parents may lose their Child Tax Credit of up to $2,000 if their children stayed somewhere else. Unless both parents sign and file IRS Form 8332 showing they’ve agreed on which parent gets the tax credit, then generally the parent who had the child for more than 182 days (six months) during the tax year is typically the one who qualifies for the tax credit, Losi notes. “Actual custody for tax purposes is actual days the dependent child was with you. It's not what you want it to be. It's exact days,” he says.
4. 529 fallout
If you paid college tuition bills from a 529 plan and then the college refunded some of that money, perhaps because of pandemic-related residence hall closures or a move to remote instruction, the money should’ve gone back into the 529 account, according to Losi. “You had 60 days to return that, or it's taxable,” he says.
5. Flaky 401(k)s
The pandemic prompted many people to stop contributing to 401(k) plans to preserve cash. But because of retirement plan regulations, a drop in company-wide participation could retroactively reduce what highly compensated employees are allowed to contribute to their own 401(k) accounts. “You have to have a certain amount of participation into the plan by non-highly-compensated [employees],” Losi explains.
That means some people may soon receive refunds of some of their 401(k) contributions, and that returned money may be taxable. “Those who maybe are highly compensated are probably getting checks this time of year, saying that, ‘Sorry, you weren't able to contribute the max,’ or, ‘You were not able to contribute how much you contributed. Here's your check. It's going to be taxable.’”
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