Pandemic-Related Changes May Affect Your 2020 Tax Return
The April 15th tax filing deadline is fast approaching, making this an opportune time to consider some things that could affect your 2020 tax returns. Many of these developments were the result of the pandemic and the work-from-home mandates along with some modifications to tax laws — and all of them require attention.
1. Where do you work?
Did the location of your employment change in 2020, from working in your office to working from home? If so, it may matter whether your employer required you to work offsite, or if working from home was your choice.
The issue of where your employment income is taxed is so thorny that it is expected to go to the U.S. Supreme Court. For example, in New Hampshire v. Massachusetts, New Hampshire is seeking to protect its “working from home” citizens from taxation by Massachusetts, where the individuals’ “normal” workplaces are, which makes them subject to that state’s income tax.
As another example, City of Philadelphia workers seeking city wage tax refunds for days worked outside of Philadelphia will need to obtain a statement from their employer attesting to the employer’s work-from-home mandate. Fortunately, many employers stopped withholding for Philadelphia non-residents when they sent their employees home, or the business is now handling the refund process for all employees. Employees of those firms do not need to take further action.
Other states and municipalities have made clear statements that they will not take advantage of the dislocations caused by the COVID-19 pandemic and will not tax the wage income of citizens temporarily working from home.
The variations are endless and complicated. We recommend you seek professional tax advice if your state of residence is different from the state of your normal workplace.
2. Stimulus checks are not income
In 2020, millions of individuals received economic impact payments — or stimulus checks — as a provision of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Technically, those checks were an advance payment of a credit against 2020 taxes. When you prepare your 2020 tax return, you will reconcile any stimulus checks against the “recovery rebate credit.” If your aggregate stimulus checks total an amount less than the calculated credit, you will receive additional credit against your 2020 taxes. If the amount you received is greater than the calculated credit, in most situations you will not have to return the overpayment.
3. Distributions from qualified retirement plans
Required minimum distributions (RMDs) from qualified retirement plans (e.g., IRAs and 403(b)s) were suspended for 2020, but we did not learn of this until well into spring 2020. Later in 2020, we discovered that, in many circumstances, taxpayers who took RMDs could recontribute or return the distributions without penalty. Be aware that tax reporting, in the form dictated by the IRS, could be confusing. Pay careful attention to how you include the distributions on your tax return, and seek professional help if necessary.
4. Interest paid by the IRS is taxable
Staffing problems in 2020 caused the IRS to take months to process 2019 paper filings and the checks sent with filings. As a result, your refund for 2019 may have been so late that you received unexpected interest on the refund. This interest must be included in your 2020 taxable income.
5. Fully fund your IRA
The 2020 contribution limit for traditional and Roth IRAs is $6,000, plus an additional $1,000 catch-up contribution for persons 50 and older. You may make contributions for 2020 until April 15, 2021.
6. Business losses
Under 2017 law, limitations were placed on deductions for business losses. As a direct result of the pandemic, the 2020 CARES Act suspended the cap for deducting business losses on individual tax returns for 2018–2020. You may want to revisit prior years to reduce the 2018 or 2019 tax burden.
7. Charitable deductions
New for 2020, you can take a deduction of up to $300 for charitable donations even if you do not itemize your deductions on Schedule A. The deduction amount is the same whether you are filing as an individual or jointly. Additionally, special liberalized deductions may apply to itemized charitable gifts of cash.
8. Amend your 2018 and 2019 returns, if appropriate
Certain tax breaks that expired in 2018 have since been reinstated for 2018–2020. Amend your prior returns if you can claim any of these:
- Mortgage insurance premium deduction
- College tuition deduction
- $2,000,000 exclusion for forgiven mortgage debt
- Credit for energy-saving improvements
9. Gift tax returns
Many individuals made large taxable gifts in 2020 in anticipation of decreased gift and estate tax exemptions in 2021. While not all gifts require you to file a gift tax return, doing so will begin the statute of limitations and limit the time period within which the IRS can come back and challenge the value or other aspects of your gift.
10. File on time
Last year the IRS extended filing deadlines, but not this year. File your 2020 taxes on or before April 15 or ask for an extension, but you must still estimate and pay any taxes owed by April 15.
11. Review your withholding
Tax brackets and rates are likely to change this year as a result of proposed legislation. Monitor your withholding from your wages and from distributions from places like your IRA or pension. Adjust your withholding as necessary.
All of these factors could affect your 2020 tax filing. We will be watching tax developments closely as the legislative landscape changes and share with you any recommendations for changes affecting 2021 tax planning.
If you have questions, don’t hesitate to contact your Relationship Management Team.
This presentation is intended to provide a review of issues or topics of possible interest to Glenmede Trust Company clients and friends and is not intended as investment, tax or legal advice. It contains Glenmede’s opinions, which may change after the date of publication. Information gathered from third-party sources is assumed reliable but is not guaranteed. No outcome, including performance or tax consequences, is guaranteed, due to various risks and uncertainties. Clients are encouraged to discuss anything they see here of interest with their tax advisor, attorney or Glenmede Relationship Manager.