Tax filing in COVID times: surprises await, and some could be good for your bottom line

"Claiming home office expenses puts you at a higher risk for an audit," warned said Rob Winton, a CPA at Citron Cooperman in White Plains.

David McKay Wilson
Rockland/Westchester Journal News

Tax Watch columnist David McKay Wilson looks at issues confronting taxpayers as they look to fill out Form 1040 this year. 

The COVID-19 pandemic could surprise you when sit down to file your income taxes this winter. Some of those surprises could be good, others might put a dent in your wallet.

The 2021 tax season's April 15 deadline looms and with many employees still working from home, the workforce has to figure out how to address all forms of state and federal aid they may have received in COVID times.

I'll address several issues in this column. To learn more, Tax Watch will team up with the New York Society of CPAs on Sat. Feb. 27 from 9 a.m. to noon for the ninth annual Tax Watch Tax Hotline to answer your questions at 914-694-5080. A team of volunteers from the Society's Westchester chapter will be available to offer advice. 

COVID stimulus payments

There were two rounds of stimulus payments in 2020. In the first round, single filers earning up to $75,000 received $1,200, with joint filers receiving $2,400. Lesser amounts were scaled back for singles earning up to $99,000, with the limit at $198,000 for joint filers. Families received $500 for each child under age 17.

In the second round, single filers received $600, with joint filers receiving $1,200, plus another $600 per child.

Rob Winton, a CPA with Citrin Cooperman in White Plains, reviews information during a tax hotline session at The Journal News office, March 1, 2014 in White Plains.

The good news is that these payments, which were based on your 2018 or 2019 tax filings, are not taxable.

College students who were in school in 2019-20 and graduated in the spring of 2020 may qualify for both rounds, said Keith Boyer, of Boyer 2 Accountants in White Plains. But that depends upon if their parents claimed the student as their dependent, which they could if the student was under age 25.

To qualify for credit, the parents could not claim the student as a dependent in 2020. In addition, the new graduate would have to be “independent,” with the parents not paying for more than 50% of the former student’s living expenses in 2020.

To obtain the credit, the graduate would claim the “recovery rebate credit” on Line 30 of this year’s Form 1040.

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Home office

So many of us worked from our home offices during close to nine months in 2020. But since federal tax reform in 2018, office deductions by employees who worked for their employer from home could not be claimed on their federal filings, said Rob Winton, a CPA at Citron Cooperman in White Plains.

However, the state of New York decoupled from the federal rules in 2019, which means home office deductions are still allowed on your state returns.

Scott Aber, a New City CPA, said state rules allow deductions for expenses that exceed 2% of your adjusted gross income. To qualify, that office must be a separate area, used exclusively for business. That means it's not proper to deduct the expenses dedicated to your dining room, where you've been working for eight months.

"Claiming home office expenses puts you at a higher risk for an audit," Winton warned. 

Unemployment

Many New Yorkers lost their jobs in 2020, or were furloughed for a few weeks, during which time they filed for unemployment through the state Department of Labor. Your unemployment benefits are taxable income, so it must be reported.

To do so, you need to obtain your state 1099-G form from the Department of Labor website. It won’t be sent to you unless you all to ask for it to be mailed. The federal COVID relief bill brought an extra $600 a week, so the top benefit in NY was $1,104 a week. The 1099-G will include both the state and federal monies you received.

Charitable deductions

The 2018 tax reform act made big increases to the standard deduction, which made it less favorable for many Americans to itemize their deductions, which include their charitable gifts. For this tax filing year, changes in federal tax law allow you to deduct up to $300 in charitable donations, even if you take the standard deduction. 

But that deduction is not allowed on your New York state filings, said Boyer. 

PPP loans  

Many business received loans under the Small Business Administration’s Paycheck Protection Program, known at the PPP program. Those loans were forgiven if you spent at least 60% of the loan proceeds on payroll, with the remainder spent on business expenses, such as office rent, utilities, and business supplies.

The tax treatment on the forgiven loans is most favorable to businesses.

First, there’s no federal income tax on your PPP loan. And after spending your tax-free loan on your business expenses, you can deduct what you spent from other taxable income, giving a double bang for your federal buck.

Employer retention tax credit

Let’s say your small business had to shut down or significantly reduce its operations in 2020 during COVID times. You could qualify for a tax credit of 50% on up to $10,000 in wages you paid each employee, for a maximum credit of $5,000 per employee.

The only hitch is that that wages can’t be paid with funds you received in your PPP loan, said Scott Aber, CPA, of New City.

He said one client, who had 60 employees, was surprised to discover how big his refund would be. 

"He’s getting back $170,000,” Aber said. “It’s something that every small business needs to look at.”

Follow Tax Watch columnist David McKay Wilson on Facebook or Twitter @davidmckay415.