At this point in the COVID-19 public health crisis, it feels a little weird to look for silver linings. Still, the delay in the tax filing deadline from April 15 to July 15 is definitely one of them. And since we’ve all got a lot of extra time on our hands, it’s natural that we’ll all invest more care and diligence in preparing our taxes, right?
Yeah, not so much. Even though 61% of people between the ages of 22 and 39 do their taxes themselves, the majority of us wait until the last minute to get it done. A recent study by Nerdwallet revealed that concerns over making mistakes, paying too much, or not getting a full refund are all worries that contribute to this chronic procrastination.
There are other weird behaviors associated with the Millennial workforce and their taxes. For instance, despite being more internet savvy than any generation before us, we have a higher rate of mailing in paper returns than our parents’ generation. A measly 8% of those who worked with a professional tax preparer (such as a CPA or tax attorney) asked important due diligence questions like “Would you represent me in the event of an audit?” or “Based on my situation, what tax deductions do I qualify for?”
Finally, and perhaps most strangely of all, when we do ask questions, we tend to avoid asking a professional. Instead, 73% of us consult family or friends. Maybe it’s the fear of looking stupid, or not wanting to pay for advice, or just not knowing who to reach out to.
That’s why we did the work for you. We reached out to a seasoned tax professional to answer the most pressing issues around filing taxes for 2019. Along with the ways that this year’s tax regulations have been adjusted in the wake of the coronavirus, we asked about what deductions you can take advantage of. After all this time away from work, you might as well come out ahead.
Standard vs. Itemized Deduction
The first big issue is whether to take an itemized or a standard deduction. When you’re preparing your taxes, you have the option to choose either. Back in 2017, the Tax Cuts and Jobs Act increased the standard deduction to $12,000, which sounds pretty great to most people.
According to Elizabeth Burlington, Esq., an attorney with Frost Law in Annapolis, Maryland who specializes in the areas of tax controversy and civil litigation, “Depending on what kind of work you do, and what kinds of expenses you have, it is often the case that the standard might be your best bet.”
However, it’s important to take a look at your options for deduction and total them up, to make sure that’s the right option for you. Yes, it’s a lot of math, but it’s all with the goal making sure you come out as far ahead as possible.
Taxes in the Time of Coronavirus
“Right now, probably the most important change to the IRS procedures is the extension of the tax year 2019 filing and payment deadlines to July 15, 2020,” Burlington says. If your situation is such that you can’t reasonably meet this deadline, you can still file for an extension to get your taxes done.
The IRS has also put a hold on automated collection action (i.e. liens, levies) as well as enforcing most outstanding tax account balances until that same date of July 15. So if you owe the IRS money that you can’t pay right now, don’t freak out. Burlington urges people in this situation to contact a tax professional to figure out a solution. (Just make sure it’s a tax professional licensed to practice in your jurisdiction since state tax laws can vary significantly.)
What If I Can’t Pay My Taxes Right Now?
The coronavirus has proved to have just as much impact on the global economy as on public health. If you’ve lost income as a result of the situation, or are going through some other form of financial hardship (pandemic-related or not) and can’t pay your taxes, set your mind at rest. Burlington says there are options available.
“In most cases, the IRS will work with you to address your liabilities through an Installment Agreement. However, if you owe a large liability that you cannot pay over time, or if you owe for multiple years, it may be in your best interest to contact a tax professional who can assist you in interfacing with the IRS.”
The key here is to not ignore the situation. Tax issues are much like health issues in this way —pretending there isn’t a problem only makes the problem worse. As much as we’ve all heard our parents vilify the IRS, the agency does respond quite well to transparency and timely communication. Notify it of your situation by phone, email, or regular mail, and make sure to document all of your communication (topic, date, names of people you spoke with) just in case something gets lost in the shuffle.
As someone who has had to make an Installment Agreement in the past, I can tell you the hardest part of communicating with the IRS is waiting for them to get back to you. Its case backlog is dizzying, and sometimes IRS agents will send notices before receiving your latest communication. So if you get a letter that wasn’t what you expected, give it a few days to see if a new message shows up, then contact the agency again and explain your confusion. It’s arduous and sometimes frustrating, but it will usually work out.
Taking Loans from Your Retirement Account
Burlington notes that the CARES Act has temporarily bent the rules around taking money from a retirement account. Normally, taking money out of your retirement plan incurs a 10% penalty, but that fee has been waived for the calendar year of 2020. So if you can demonstrate that you’ve been affected by COVID-19, you can take up to $100,000 or 100% of the account balance for the next six months (whichever amount is less).
Here are a few more changes:
- You’re now permitted to “loan” yourself double the usual amount permitted for a 401(k).
- The required 20% income tax withholding for rollover distributions is suspended for the next six months.
- Any taxes due on a coronavirus-related distribution can be paid over a three-year period.
- You have up to three years to recontribute the amount to a qualifying plan or IRA.
- An in-service distribution from a qualified retirement plan also is permitted if it is coronavirus-related.
So, What Was That About a Stimulus Payment?
By now, many taxpayers have already received a little something from Uncle Sam to help out during these tough times. However, if you didn’t receive a stimulus payment yet, it could be for several reasons, says Burlington.
“You may have earned too much to qualify for a payment, or to qualify for the full $1,200 amount,” she explains. “Unfortunately, the websites the IRS set up in order to determine eligibility and payment status appear to be experiencing significant problems and have been widely reported to be unhelpful. Hopefully, soon there will be further guidance issued by the U.S. Treasury and the IRS regarding eligibility and payment.”
What, you were expecting the U.S. government to get it right the first time?
Deduction Opportunities Most People Miss
According to Burlington, there are a few main categories that some taxpayers overlook when itemizing their deductions:
- Tuition for higher education. If you’re in college, grad school, or any other degree program, chances are you will be able to deduct the amount that you paid for your tuition in that tax year. Your school should issue you a 1098-T, so don’t ignore it! If you’re in school even part-time, you might be paying more in tuition than the amount of the standard deduction.
- Out of pocket healthcare expenses. Sometimes this one slips through the cracks since people might think it only applies to amounts paid to healthcare professionals for medical and dental expenses. However, if you are paying your own health insurance premiums out of pocket you may be able to deduct all or a portion of those amounts under this category.
- IRA and 401(k) contributions. You may be able to deduct contributions to a traditional IRA or a 401(k) plan subject to certain rules and limitations. For example, in 2019, you can contribute up to $19,000 per year to a qualifying 401(k) plan.
Taxes for the Self Employed
If you run a side hustle, work as an independent contractor, or make any other kind of self-employment income, you may be entitled to deduct certain expenses related to the operation of your business. We’re talking rent and car expenses, interest on loans taken out to fund your business, health insurance costs — there’s quite a list, which you can find here.)
“However,” says Burlington, “these expenses need to be carefully documented and reasonable.” In other words, you can’t just ballpark your numbers. Nor can you fudge the definition of a “business-related” expense.
The 2017 Tax Cuts and Jobs Act (TCJA) eliminated several of these tax deductions for the self-employed. but a few hours of careful research are definitely worth the savings in deductions. And hey, if you’re not sure, be an overachiever and reach out to a pro with your question. (You can deduct whatever amount they bill you on next year’s taxes.)
The above information is not intended to constitute legal advice or create an attorney-client relationship. For more information, or for advice regarding your specific situation, contact a tax professional who is licensed to practice in your jurisdiction.
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