Take one new tax law that passed on December 27. Add payment delays at the IRS. Top with one global pandemic. “This is one of the nation’s most important tax seasons ever,” says IRS Commissioner Chuck Rettig.
In short, lots of issues lie in wait for taxpayers this year. Travel advisors surely understand that it is important to talk to a professional when making important decisions in a rapidly changing environment. But as you work with your tax advisor, here are some new developments to consider
File early—especially if you might qualify for a stimulus check based on your 2020 income.
Even if you do, though, don’t expect to get a check as fast as you did in the past. This year, because it is revamping its systems to handle the new regulations, the IRS did not even begin accepting filings until February 14. Last year, it already had processed 39.6 million income tax returns and issued 18 million refunds last year by that date. (Last year’s average refund was $2,535.)
File online and use direct deposit.
Faster, easier, cheaper—and first to get stimulus checks. About 16 million taxpayers filed paper returns last year, and many of those waited six months or longer to have their forms processed, according to Congressional testimony by Taxpayer Advocate Erin M. Collins.
To avoid holding up your refund, be sure to include everything you need when you file. You can set up an online account at IRS.gov and click on “Get Your Tax Record” to see all the documents on file at the IRS regarding your account.
Beware the double dip.
On February 5, the Senate passed new regulation regarding “mobile workforce taxes” to address those who have been working at home. So things are in flux in this area as we go to print. Here are the current regulations:
If you’ve been working from home in a different state than the one in which your agency is based, you may have to file and pay taxes in both states, whether you are the agency owner or an employee. Some states, like New York and California, are very aggressive in this area; New York’s “convenience rule,” for example, requires employees of New York-based companies to pay the full amount of income state tax even—if they work at home in a different state. Similar rules exist in Arkansas, Connecticut, Delaware, Nebraska, and Pennsylvania. Other states, though, have agreements with their neighbors that allow commuters to file and pay only where they live. Fifteen states, including Maryland, Virginia, and the District of Columbia, have agreed not to enforce tax rules for remote workers, according to the American Institute of CPAs.
Some states only require you to pay taxes if you work there more than 183 days (half the year). If that might apply to you, be careful to track the days you work in each state.
Don’t forget Unemployment Insurance if you collected.
No, Virginia, there is no Santa Claus (but Congress may be coming down your chimney soon). Unemployment insurance payments are taxable income—but a bill in Congress proposes allowing the first $10,200 tax-free. To see how much you earned, you should have Form 1099-G, or be able to access it on the state site where you file for weekly benefits.
If you are still receiving payments, note that you can opt to have 10% withheld from your checks each week for taxes. If you think you will be eligible for a refund, though, it’s better for the money to be in your hands than those of the IRS.
Didn’t get your stimulus check?
You can calculate the credit owed to you based on your 2020 income and apply for the full amount, or ask for more if you believe you got the wrong amount. And yes, Virginia, stimulus funds are tax-free—and if you received too much, you can just keep it.
Burdened by bills from Covid-19?
If you, your spouse or a dependent has been diagnosed with COVID-19, or if your business has experienced adverse consequences due to the virus, you may be able to take a distribution of up to $100,000 from your retirement plan without paying the additional 10% federal tax that normally is due on withdrawals made before you reach age 59½. You will have to pay income tax on the withdrawal, but if you repay the full amount within three years you can undo these tax consequences. Be very cautious about withdrawing from your retirement fund, however; discuss this with a financial advisor or CPA.
Don’t forget your side gigs.
Even beyond income taxes, self-employed workers must pay 15.3% of the first $137,700 of net income to cover Social Security and Medicare. You can offset this somewhat by claiming all your expenses, including advertising, supplies, equipment, and your home office. If you have been moonlighting as a driver for a ride-share or delivery company, you also can write off car washes as an eligible expense.
Be careful with that home office deduction, though.
Business owners can take a flat deduction or pro-rate expenses of a home office that is used solely for work (so be sure to park that Peloton elsewhere)—but employees who are working from home cannot. The agency can, however, pay for any upgrades needed to convert a room in an employee’s home into an office (better internet access or a printer, for example) and write them off as a business expense.
Charity is from the heart. But it pays off now.
A new provision in the tax code allows deductions of cash donations (but not donations of clothing or stock) of up to $300 to qualified organizations, even if you take the standard deduction of $12,400 for single filers or $24,800 for couples. Donations of $250 or more require a written acknowledgment from the charity, not just a receipt. This is an above-the-line deduction, so it comes off your adjusted gross income. (If you do itemize charitable deductions, you also can write off hours you spent worked in a soup kitchen or mileage for delivering packages to the homebound.)
If you donate to charities every year, consider putting several years’ worth of gifts into a donor-advised fund (DAF) you can write off in a single year, even if you distribute the money over a few years.
And charity begins at home. If you have family members who are in need, you can gift them up to $15,000 per year ($30,000 for a married couple) without being subject to gift or income taxes.
Pay as you go, or not if you can’t.
Independent contractors must pay quarterly taxes, if you expect to owe more than $1,000 on your self-employed income. But, if the total of your withholding and estimated tax payments cover at least 90% of the tax you owe for the year, or 100% percent of the tax for the previous year, you shouldn’t owe a penalty. There’s also no penalty if your calculations are off by less than 10%, as long as you pay on time.
May your tax bill be low and your refund be quick.
Thanks to Robin Bokur-Lambert, an independent contractor at an Expedia Cruises franchise in Ft. Lauderdale, who has been moonlighting as a tax preparer for 20 years, for her input on this column.
Cheryl’s 40-year career in journalism is bookended by roles in the travel industry, including Executive Editor of Business Travel News in the 1990s, and recently, Editor in Chief of Travel Market Report and admin of Cheryl Rosen’s Group for Travel Professionals, a news and support group on Facebook.
As an independent contractor since retiring from the 9-to-5 to travel more, she has written regular articles about the life and business of travel agents for Luxury Travel Advisor, Travel Agent and Insider Travel Report. She also writes and edits for professional publications in the financial services, business and technology sectors.