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With a new year brings new tax questions. Let’s dive into the most common tax questions I’ve heard in the month of January.

Is my stimulus payment taxable?

No, absolutely and unequivocally no. The stimulus money isn’t included in your taxable income and won’t count against you in almost any scenario. The one situation that could cause issue is receiving a stimulus payment in 2020 or 2021 for someone who died in 2019. In this case the IRS directs that you must pay the money back. This can be done by check or money order directly to the IRS or by writing void on the signature area of the IRS check and mailing it back to them.

What tax laws changed?

This is a tough one to answer in an FAQ. Essentially the CARES Act and its updates introduced many complicated additions to the year, such as allowing Covid-19 hardship distributions from retirement accounts that can be taxed over a 3-year period. Or allowing an above-the-line charitable contribution deduction of $300. Ultimately, I would recommend working with a competent tax advisor to ensure you leverage the 2020 changes in whatever ways benefit you.

What changes will the new administration make?

Let me just pull out my crystal ball real quick and I’ll give you the rundown! Tongue-in-cheek aside, President Biden first campaigned on repealing the Tax Cuts and Jobs Act of 2017. However, he later modified his approach to keeping some of the TCJA and removing the benefits of those earning about $400,000 or more in a year.

It’s impossible to know exactly what changes will be made, but President Biden was clear that taxes would increase for some Americans in order to pay for his administration’s agenda. To what extent the things he said will be realized I can’t say. I’ve learned not to take many politicians at their words and instead judge them by their policies.

Do I need to change my tax withholding?

This is a frequently asked question every single year. Any tax advisor worth their salt can help walk you through what your withholding needs to be given the current tax laws. The difficulty comes when trying to anticipate what changes may be made to those laws moving forward and accounting for that in your calculations. Without the benefit of foresight, we just have to work with best available knowledge and keep abreast of new information and pivot accordingly.

A new wrinkle has been introduced for 2021 regarding the IRS’ efforts in ensuring your withholdings are appropriate for your income. We’ve recently begun seeing letters from the IRS to individual taxpayers regarding their withholding elections, stating they could be assessed a $500 civil penalty for reducing their tax withholding without reasonable basis.

To be clear, there is already an under withholding penalty in place to incentivize taxpayers to keep their withholding within an appropriate margin of their income and tax. These letters we’ve seen from the IRS recently appear to be a brand-new effort to keep taxpayers from underpaying throughout the year.

How do I deduct my working-from-home expenses during the lockdowns?

This question has a short answer and a long answer. I’ll give you the short answer first and the long answer in an abbreviated format. The short answer is if you’re an employee working for a business, your home office expenses are not tax deductible. Regardless of other specific circumstances, an employee’s home office expenses cannot be used as an itemized deduction or any other type of business expense.

Independent contractors and self-employed folks may have an opportunity to claim their home office expenses as a business expense. This means the answer to this commonly asked question depends on your employment status where you work.

When can I file my 2020 tax return?

The IRS announced that their electronic filing system will not be accepting e-filed returns until February 12th. Before you get it into your head that you can paper file and mail your tax return in, I should tell you that e-filing has an incontrovertible list of benefits that are too helpful to be ignored. If you can, you should e-file your tax return each year.

It’s worth noting that many forms are not yet ready for electronic submission and it’s possible not all these outstanding forms will be ready by the 12th. There have been years in the past that the IRS has delayed filing certain forms until mid-March, though those situations are certainly the exception, not the norm.

Do I qualify for any Recovery Rebate Credit?

The Recovery Rebate Credit was put in place to ensure all those who were due stimulus payments received the correct amount. The good news this year is if the IRS gave you more stimulus money than you qualified for, they’re not actually back-taxing you on any of the overage.

That being said, if you received less than you qualify for on your 2020 filing, you will receive the Recovery Rebate Credit to make up the difference between what you received and what you qualify for. This could happen if you earned far more income in 2019 than you did in 2020, resulting in a higher qualifying stimulus payment.

Should my parent file their own tax return to collect a stimulus?

This is going to be a hot topic for some folks this year. If you have a parent living with you and drawing Social Security benefits, you’ll need to plan this out carefully. Your parent may not have an income tax filing requirement and may be claimed as a dependent on your tax return.

If this is the case, they won’t receive a stimulus payment. I’ve received this question several times this year and it can be a tough one to answer. You see, the stimulus requirements are similar to the dependency requirements. You must qualify to claim yourself to qualify to receive the stimulus.

This may mean you can manipulate the tax filings to assist your parent in receiving a stimulus payment that they don’t qualify for. You’ll require some professional assistance to walk you through this one as you don’t want to end up on the wrong end of an IRS inquiry.

The new year has introduced many new tax questions and challenges. At Molen & Associates we’re committed to answering questions on a case-by-case basis, ensuring each individual has an answer suited to their unique tax situation. Visit our website for more valuable resources and educating blogs post here or give us a call and schedule an appointment to meet with one of our professional advisors. Work with us and find answers to your unique questions.

Kevin Molen
Advisory Services Manager

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