COVID seems to have made everything more complicated, including a quick run to the grocery store or a visit to the gym for a workout. Unfortunately, taxes are no exception. Already confusing on the best of days, the Coronavirus and Coronavirus tax relief packages are further muddying the tax waters. 

Although COVID tax relief packages can make your taxes seem more complicated, the good news is that they’re actually designed to help struggling taxpayers. With a good understanding of the rules, you can come up with a solid tax plan that will benefit you when it’s time to file your 2020 taxes. Here’s what you need to know to plan your tax strategy and avoid a hefty surprise tax bill at the end of the year.

How Covid 19 Affects 2020 Taxes

Teleworking

teleworking in 2020

Working from home can be a blessing or a curse come tax time. There are exceptions to every rule, but you’ll typically pay resident income tax in the state where you live and non-resident income tax in the state where you work. Some states allow you to take a credit for taxes paid to another state so you don’t get taxed twice, but that’s not always the case.

If you normally work across state lines but are now teleworking from home, your workplace has technically changed. You may owe less tax to your work state but more in your home state. Make sure you understand each state’s tax rate so you don’t get a large tax bill from your home state.

Some states have agreed not to make any 2020 tax changes. For tax purposes, these states are ignoring changes in your workplace location if you and your employer made them purely because of the pandemic. 

If you’re not sure who you’ll owe what, call your state’s Department of Revenue or talk to an accountant. Planning ahead now could avoid a surprise tax bill later. If you live in Alaska, Washington, Nevada, Texas, Wyoming, South Dakota, Florida, Tennessee or New Hampshire, you won’t have to deal with this issue as there is no state income tax.

Payroll Taxes

payroll taxes

This one is tricky. To provide some Coronavirus tax relief, President Trump signed an executive order allowing companies to temporarily stop withholding certain payroll taxes from pay checks. While the President does have the power to have payroll tax deferred or delayed, he doesn’t have the power to forgive it. This is a very important distinction.

By suspending payroll tax deductions, President Trump succeeded only in delaying the inevitable. Even if your employer stops taking taxes from your check, you will still owe them at the end of the year. Congress could opt to forgive the taxes altogether, in which case you won’t have to pay them. But if they don’t, you’re going to get a large tax bill at filing time.

The best way to protect yourself is to ask that your employers continue to withhold taxes from your check. Some companies are already doing this. Others will do so only if an employee asks. If your company insists on deferring the tax and won’t take it from your pay, make sure you set aside some money every week so you have it come tax time.

Home Office Deductions

The 2020 tax changes complicate tax time enough — don’t compound the issue by taking credits you’re not eligible for. We’re talking about the home office deduction. Self-employed people and independent contractors are the only workers allowed a home office deduction under the Tax Cuts and Jobs Act passed in 2017. They can only take it, however, if there is a corner of the house that they use for business and nothing else.

Working at your kitchen table because of COVID restrictions doesn’t meet the deduction criteria, although it’s anticipated that many taxpayers will erroneously claim it in 2020. Because it’s so misunderstood and misapplied, taking the home office deduction makes you more likely to get flagged for an audit.

529 College Funds

529 refund

A 529 college plan allows you to save money for college without paying tax on the interest that accrues. COVID has complicated this issue, too, however. 

Let’s assume you started a 529 college fund for your daughter. In the fall, you withdrew money from the plan to pay for her room and board at college. After a week of school, however, a COVID outbreak closed the dorms and forced her to come home. Luckily, the school refunded the money you paid for room and board since your daughter won’t be living there.

What do you do with the refund money? Your best option is to put the money back into the 529 fund as quickly as possible. 

It’s your money so, technically, yes, you can keep it and spend it however you like. But the fund is meant to cover college expenses – not generate tax-free income for you. If you don’t return the money to the 529 fund, you’ll have to pay a 10% tax penalty when you file your taxes.

Are My Unemployment Benefits Taxable?

In a word, yes. The IRS considers unemployment benefits taxable, and they haven’t changed their minds. All of your benefits are taxable, including the extra $600 per week payment that the federal government supplied. 

Depending on how your regular salary compares to unemployment benefits padded wth $600 extra, you could pay more tax on unemployment than you did when you were working.

The best way to combat a tax surprise is to ask that your state withhold taxes from your unemployment benefits. If you haven’t done so, be sure to set some money aside from every payment for tax time.

Coronavirus Related 2020 Tax Changes

Tax Deadlines

As you are likely well aware, tax day is ordinarily April 15. The IRS changed the tax deadline in 2020 to give taxpayers working around COVID issues more time. Instead of filing your 2019 taxes by April 15, 2020, the IRS extended the tax deadline to July 15, 2020.

If that still isn’t enough time, you have the option of filing an extension. If so, your tax return isn’t due until October 15, 2020.

Note that an extension is not the same as a delayed filing deadline. You have until July 15, 2020 to file your 2019 taxes and pay any tax due. If you request a tax extension, your filing deadline is delayed but your payment due date is not. Any taxes you owe are still due July 15, 2020. Only the filing of the return is extended to October.

The changes in tax deadlines affect other aspects of your taxes as well. Taxpayers now have until July 15, 2020 to contribute to an IRA or health savings account (HSA). For both 2019 and 2020, the maximum contribution you can make to an IRA is $6,000 if you’re under the age of 50 or $7,000 if you’re age 50 or above.

Quarterly Tax Schedule Changed

If you expect to owe more than $1,000 in income tax at the end of the year, the IRS requires you to make estimated tax payments throughout the year. Many states also require estimated tax payments, and each has its own rules about when you must pay them.

When the government changed the tax deadlines due to COVID, they also altered the estimated payment schedule that most taxpayers follow. If you owe tax on money you earned between September 1, 2019 and December 31, 2019, your estimated tax payment is due January 15, 2020. Other tax payment due dates have shifted as follows:

  • Money earned January 1 to March 3, 2020 – due date is July 15, 2020
  • Money earned April 1 to May 31, 2020 – due date is July 15, 2020
  • Money earned June 1 to August 31, 2020 – due date September 15, 2020
  • Money earned Sept 1 to December 31 2020 – due January 15, 2021

Penalty Free 401K Withdrawals

Under normal circumstances, you must reach a certain age before you can pull money from an IRA account, 401(k) or a 403{b). But 2020 has been anything but normal circumstances and these rules have changed.

In the year 2020, you can pull up to $100,000 from your retirement accounts without penalty. You may need to pay the money back according to your plan’s rules, but you won’t face a tax penalty for pulling the funds before reaching retirement age.

Note that money you withdraw will count as income and get taxed as such, you just won’t have to pay the extra penalty for pulling the money early. To make the tax burden easier to bear, the IRS is allowing you to spread tax payments for the withdrawal across 2020, 2021 and 2022.

If you’re able to repay the money you took from your retirement account within three years, you won’t owe tax on it and can get a refund of any taxes you already paid on the money. This provision is meant to allow you to stay current with your finances and give you time to recover from COVID financial stress without being bombarded by tax penalties and fees during an already difficult time.

Smart Tax Planning for 2020 Year End

Navigating the 2020 tax year is undeniably tricky, but good planning can get you ahead of the tax law changes so you don’t find yourself trampled by them. One way to combat 2020 taxes is simply to be generous. In 2020, taxpayers may deduct up to $300 worth of charitable giving.

It’s also a good idea to mock up a tax return or have your tax professional review your finances with you. If it looks like you’re going to come up short and owe taxes, ask your employer to increase the amount they withhold from your paycheck. If you act now, you may have time to combat a big tax bill later. Don’t wait until April 15 and then realize you’re in trouble.

Talk to your financial advisor as well. Investing in designated opportunity zones can greatly boost your earnings without substantially increasing your tax liability. Certain improvements to your home and other buildings you own can also help thanks to generous depreciation bonuses.

Businesses, too, can sometimes get refunds quickly thanks to COVID. Businesses can deduct certain losses if they’re located in a designated disaster area. Given the severity of the COVID outbreak, President Trump declared all 50 states disaster areas, making it possible for businesses everywhere to quickly recoup some of their Corona-related losses. 

Both businesses and individuals may find themselves in a position to take advantage of the current low interest rates as well. Now is a good time to purchase assets at a low interest rate. The market value of some assets has plummeted thanks to COVID, too, allowing savvy investors to snag certain types of property potentially for pennies on the dollar.

Get Help Navigation This Unprecidented Tax Season

If you’re like most Americans, this probably all sounds pretty overwhelming. Most of us work all year and then hop online come tax time, plodding through our income tax filing with the help of online software that sometimes confuses us more than it helps. 

Fortunately, you don’t have to go it alone. At Picnic, we have live accountants who can help you plan for and file your income taxes on an as needed basis.

Picnic Tax’s elite network of online accountants and CPAs is second to none. Membership in the Picnic Tax online accountant network is both credential and test-based – every accountant in the network has taken and passed Picnic’s proprietary accounting exam with flying colors.

Our technology facilitates the process of first finding and then subsequently working with an accountant to file your taxes. Based on your unique tax situation, we match you to your ideal, pre-vetted accountant and then you and your accountant work together directly on our intuitive tech platform.

We also negotiate standardized (and discounted) prices with our accountants, so you know you’re getting a fair deal. Finally, our platform processes payment to your accountant (through Stripe) which eliminates another common headache of working with an independent accountant or CPA.