As individual income tax preparation kicks off, new laws are causing confusion and adding complexity — all while trying to provide economic relief.
Economic Impact Payments (known as stimulus checks) received in 2020 and/or 2021 are not taxable income.
But federal and state unemployment compensation is taxable. Form 1099-G will show the unemployment compensation you received and need to pay tax on.
Most taxpayers take the standard deduction. For 2020 and 2021, you can deduct cash donations to qualified charities up to $300 in 2020 even if you don’t itemize. Teachers can deduct up to $250 for COVID-19-related supplies and other qualifying expenses.
If you itemize, you may have more medical expenses than you realize. Medical expenses are deductible to the extent they exceed 7.5% of your adjusted gross income. If caring for family members in your home, they may be your “medical dependent” and you can deduct medical expenses incurred for them. A medical dependent is someone for whom you provide over 50% of their support. You may also qualify for the dependent care credit.
For those who itemize, mortgage insurance premium deductions are extended by one year and the limit on cash contributions to charities was increased to 100% of the individual’s adjusted gross income in 2020 and 2021.
For “gig” economy or self-employed workers, report your income and expenses on Schedule C of Form 1040. Net income will be taxable to you regardless of whether you withdraw cash from the business. Business expenses will be deductible against gross income and not as itemized deductions.
If your business generated qualified business income, you may be eligible for the 20% pass-through deduction. If you worked from a home office or stored inventory in your home, you may be entitled to deduct certain home maintenance costs. Consider establishing a qualified retirement plan. Plans such as a simplified employee pension (SEP), solo 401(k) and “savings incentive match plan for employees,” (SIMPLE) allow contributions to be deductible and considered income only when money is withdrawn. . Even without establishing a retirement plan, you may still contribute to an IRA.
For 2020, you’ll pay self-employment tax at 15.3% on net earnings up to $137,700, and Medicare tax at 2.9% on the excess. This is in addition to income tax, but half of it can be deducted. Health insurance premiums for you and your family may be 100% deductible. Expenses for insurance, automobile, travel, meals, home office and others are subject to special recordkeeping requirements or limitations.
Distributions from your retirement plan may not be taxable and you may not owe penalties for early withdrawal if it was a “qualified disaster distribution” up to $100,000 from an eligible plan.
For taxpaying parents, you are eligible for a refundable credit if your child tax credit (CTC) exceeds your tax liability. To determine the amount, you can substitute the earned income from 2019 instead of 2020.
Tax law is more complicated than ever. Be sure to consult your tax advisor.
Teri Kaye is the tax services leader/partner-in-charge of Daszkal Bolton’s Fort Lauderdale Office where she specializes in holistic tax planning and compliance. Daszkal Bolton was founded in 1992 in Boca Raton by Michael Daszkal and Jeff Bolton. Visit dbllp.com or email Teri Kaye [email protected].