Like all things 2020, filing your taxes might look slightly different this year. With everything that’s gone on this year, now’s a good time to consult with a tax professional if you haven’t before.
The combination of unusual circumstances mixed in with a fairly recent tax amendment (the 2017 tax overhaul), has caused some questions to arise. What if you relocated mid-pandemic? And what if you’ve been working from home for most of the year? Can you write off your rent or mortgage? What about that new office chair or printer—can you deduct those items?
The short answer is, ‘no,’ at least not if you’re a W-2 employee, but there are a few things to consider. Here’s what you need to know as you prepare for tax season.
The home office stipulation
A significant amount of the workforce saw their homes become their offices overnight—many spending the majority of the year in these new “home offices.” As expected, people are wondering whether they can claim expenses, such as internet, home office updates, etc.
In the past, employees who itemized tax deductions on their federal returns were able to include various work expenses as miscellaneous deductions. Though in order to receive a tax break, these miscellaneous deductions had to top 2% of an adjusted gross income, and even when that criteria was met, only the amount exceeding the 2% threshold could be deducted.
But the Tax Cuts and Jobs Act (TCJA), effective from 2018 through 2025, has eliminated this option. There is an exception, however, if you’re a contractor or freelancer, as the TCJA didn’t change home office expenses rules for people who are self-employed. This goes beyond merely working from home though. Employees who receive a paycheck and a W-2 from an employer are not self-employed, and can’t claim the home office deduction, regardless of the reason they’re working from home.
If you’re self-employed, you can find deduction information in IRS Publication 587, but here are a few simple questions to ask yourself to see if you might qualify for potential deductions.
Is a portion of your home used “exclusively and regularly” as your principal place of business?
Do you have a “place where you meet or deal with clients” regularly?
In order to qualify for a tax deduction, you’ll need to be able to show that your home is where you conduct most of your essential business activities.
There’s one more exception, and it comes at the state level. If you reside in one of these seven states, you may be allowed to make deductions on your state income tax returns.
Rules regarding the qualifying amount of unreimbursed expenses varies by state, so be sure to check your state’s specific instructions and talk to your tax professional.
With remote work and social-distancing measures in place, we’ve seen an uptick in people both permanently and temporarily relocating, which can have various implications depending on your state or your employer’s state.
If you’ve moved permanently, filing your taxes should be the same as it was in year’s past with a move, similarly to if you’ve ever switched jobs mid-year. You’ll just need to ensure you cover both states if you’ve moved out of state.
But what if you’ve relocated and you now reside in a different state than your employer? Or what if you’ve temporarily moved to a vacation home in another state because of the pandemic? If you’ve been there for six months or more, you probably owe taxes in both states. This is where it gets tricky, and many experts advise checking in with a tax pro if this is your case.
If you work in one state and live in another, you could end up having too much tax withheld from your paycheck for your nonresident state and not enough from your resident state. And for a tax credit, you have to file in the right order: first filing and reporting income to the state where you work, then claiming the credit on your resident tax return in the state where you live.
But there are some states with reciprocity to other states. If the state you live in has a reciprocity agreement with the state you work in, you’re in luck, and should only have to file in the state where you live.
It comes as no surprise, that even your taxes might be complicated in the good ol’ year 2020. But hey, filing your 2020 taxes means you’ve entered 2021 and we can all hope for a better year.
Information provided is not tax advise. Please consult your tax adviser with related questions.
By: Kristen Elliott