Wilbur O. and Ann Powers College of Business

Surviving tax season: tips for taxpayers

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Editor’s note: On March 17, 2021, the Treasury Department and Internal Revenue Service extended the 2020 federal income tax filing due date for individuals from April 15, 2021 to May 17, 2021.

Filing taxes may be even more challenging this year with changing laws and a shortened filing period. As April 15 is fast approaching, Lynn Martin, a certified public accountant, chief financial officer of MST Concrete Products and Clemson University lecturer in the School of Accountancy at the Wilbur O. and Ann Powers College of Business, answers 10 of this year’s most popular questions to help taxpayers survive tax season. Whether discussing deductions, stimulus checks and unemployment, or tax credits, home office claims and retirement account penalties, she offers tax return tips for first-time filers, retirees and those in between.

Should I take the standard deduction, or should I itemize?

The IRS says nine out of ten people are going to be using the standard deduction instead of itemizing deductions. For 2020, the standard deduction for single taxpayers is $12,400. That’s doubled — $24,800 — for married filing joint, and for Head of Household, it’s $18,650. That’s a lot of money for you to try to pass your itemizing hurdle. That’s why many people are now taking the standard deduction instead of collecting all of their information to get enough to itemize. Those itemizing numbers are indexed and increase every year. They’re going to go up for 2021.

What happens to my charitable contributions if I take the standard deduction?

If a taxpayer is not itemizing, the individual won’t get the benefit of those charitable contributions. However, Congress created an above-the-line deduction for charitable contributions. This means even if you don’t itemize, you can still deduct up to $300 in cash contributions but not donations of clothing or other items. It must be a cash contribution to a qualified charity. The Internal Revenue Service has a tax exempt organization search tool on their website that can be used to see if a charity is a qualified charity. If you make a charitable contribution through your paychecks to an organization such as United Way, you won’t completely lose your charitable contribution. You can still claim up to $300.

Will I have to pay taxes on the stimulus check I received last year?

The stimulus check is not taxable income, so you do not have to include it in your taxable income for your 2020 tax return.

Do I need to pay taxes on unemployment benefits I received?

A lot of people don’t realize that unemployment is taxable. If you start collecting unemployment, it is incredibly important you tell the unemployment office to withhold federal and state income taxes from that payment. I’m afraid many individuals are going to get a very bad shock when they start preparing their 2020 tax return and have to have to pay taxes on the unemployment they collected.

Can I deduct for a home office if I’ve been working from home during the pandemic?

The bad news is the Tax Cuts and Jobs Act of 2018 did away with unreimbursed business expenses, so employees cannot deduct a home office—even though you may have worked remotely. Only self-employed individuals can deduct the cost of a home office, and the big warning there is that the room for their home office has to be used continuously and exclusively as the home office. If they use that space for anything else other than a home office and get audited, then the IRS is going to deny that deduction. Let’s say they set up a home office in their spare bedroom, and they have a bed in there where guests might sleep. Or maybe they use their daughter’s bedroom as a home office, while she’s away at college. Then, they can’t claim a home office on their taxes.

Should I take the deduction for education expenses, or should I take the credit?

Congress has taken away the deduction for education expenses but has relaxed the phase out amount.  With the Cares Act, Congress increased the phase out so now it starts phasing out at $80,000 for single individuals and $160,000 for married filing joint, making it available to more taxpayers.

If you are under the amount, there are two education credits: the American Opportunity credit and the Lifetime Learning credit.

The American Opportunity credit is a maximum of $2500 per student, per year, for the first four years of that college student’s post-secondary education. If you have quadruplets going through college at the same time, you can get it four times for four years.

The Lifetime Learning credit has not changed. It’s up to $2,000, per taxpayer, per year, so you can’t get multiples. However, the Lifetime Learning credit is forever after that, so it can be applied to graduate school or continuing education your employer doesn’t pay for. This credit is a percentage of your total cost, but you can take up to $2,000.

At what age do I need to start taking distributions from my retirement account?

Under the Cares Act, the required minimum distributions for retirement accounts were waived for 2020, so individuals did not have to take the required minimum distribution.

The Secure Act moved the age where someone must start taking required distributions. Before the Secure Act, if you reached age 70 and a half, then you had to start taking distributions from your qualified plan such as an IRA. If you didn’t take distributions from that qualified plan planned, then you had to pay a penalty for not taking the money out. Now, the Secure Act moves that age from 70 and a half to 72 and allows you to keep putting money in the account if you have earned income until you’re 72.

Will I be penalized for taking money out of my retirement account during 2020?

Some individuals had no other choice but to take money out of their qualified plan during the pandemic. The limit was $100,000, so you couldn’t take more than $100,000 out without paying a penalty for early withdrawal. The Cares Act said as long as you used that money on COVID-related issues and put the money back within three years, you don’t have to pay a penalty. You still have to pay the tax on it, but you don’t pay the 10% penalty for taking it out early. If you have not put the total amount back in by the end of 2020, then one-third payment of the tax on the amount distributed is due with your 2020 return.

Do I qualify for any kind of tax credit for my child?

The Tax Cuts and Jobs Act did away with the personal dependency exemption amount. Instead, the standard deduction and child tax credit were increased to mitigate doing away with the dependency exemption. If you have a child that is under seventeen at the end of the year, December 31st, that child qualifies for a $2,000 tax credit.  Other dependents may qualify for a $500 credit.  The credit is phased out at high income levels, so check to make sure your credit is not partially or fully phased out.

A lot of people ask why they even have to indicate they have dependents on their tax returns. It’s still important to determine if a taxpayer has a dependent for filing status, because a head of household has to have a dependent living in a household with them. For the American Opportunity Credit, the individual you claim has to be either yourself, your spouse or your dependent. There are a lot of places in the tax law, where you still have to have that designation as a dependent. It’s not just because of the dependency exemption. So, even though we don’t have the dependency exemption anymore, it’s still important that we determine if an individual qualifies to be a dependent.

Do you have any tax advice for me as a student and first-time filer?

If you’re a student, part-time employee or first-time filer, hands-down, you should check out IRS Free File. The 2020 adjusted gross income limit for Free File is $69,000, and you can use your smart phone or tablet to do your taxes.

While this tax season comes to a close, it’s never too early to start preparing for next year’s tax return. Taxpayers who receive large returns may want to check the number of dependents on their W-4 forms. The higher the number of dependents on the W-4 form, the less taxes will be withheld each pay period. The lower the number of dependents, the more taxes will be withheld each pay period. The IRS has an income tax estimator to help walk individuals through the process of determining their withholding amount.

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