It seems like the last
tax year never ended; it just flowed into this year. Of course, with COVID, last
year has been pretty crazy. In fact, in addition to our health, schools,
simchas, and shuls, the virus has affected our taxes.
COVID Tax Issues
First, two minor
points: 1) You did not have to take money (RMDs) out of your IRAs and
retirement accounts in 2020. 2) You also get to claim charity of $300 if you do
not itemize. Nothing overwhelming there.
The government has
now issued two stimulus checks. The first check, back in May, gave $1,200 per
parent and $500 per child under 17. The second check (January 2021) gave $600
per parent as well as per child. It was only for people whose income was under
$150,000. If you did not receive money you are entitled to, you will receive
that money when you file your 2020 tax return. I am getting many questions on
this one.
One reason you
might not have received your money is if a child was born in 2019 or 2020. The
IRS might not be aware of the child, and you therefore did not get the stimulus
for that child. You will now get it.
On the flip side,
if you received too much money you generally do not have to return it. This
could happen if your income was under $150,000 in 2018 and over $150,000 in
2020. If you received money for a deceased person, however, you should return
it, according to the IRS website.
Students and Stimulus
I am seeing the
following, and it is disturbing: College students figured out that they can
apply for a stimulus payment on the IRS website. There seem to be (well
meaning?) advice givers telling college students how to get free money in the
tax realm, and they are often giving out inaccurate advice. I have seen this in
previous years but in 2020 it increased.
What happens is
that when their parents filed their taxes, the return bounced. This typically
happens when you e-file and claim a dependent who has already been claimed or
has already filed a tax return.
Here’s the
problem: These students were not allowed to claim this stimulus payment because
they did not support themselves; their parents supported them. If the students had
read the fine print, they would have known that. I would recommend that the
student return the stimulus payment since requesting it was fraudulent.
Other Issues
1) Being married affects
your taxes. Plan dates of marriage (and divorce) accordingly.
2) Dependents
(typically your children) save you taxes. Make sure you can claim your
children. Issues arise when a child is over 18 and not a full-time student. If
a child is over 23, then there is a strict income test. If the child earns one
dollar over that amount, they cannot be your dependent. There is no way around
this.
3) If you have
employee expenses, make sure that your employer reimburses them because you
cannot deduct them as an employee. This opens up a great discussion regarding
home office expenses in light of so many people working at home. There are many
issues here, but in order to have a home office deduction, that space must be
used exclusively for work and nothing personal.
4) Time your
payments for day care and college to maximize savings. In brief, tax deductible
daycare costs cap at $6,000 per year, and the American opportunity tax credit
caps at $4,000 per student.
5) It is much more
difficult to itemize deductions. This means that charity will not help you. If
you cannot itemize, consider giving charity every other year (called bunching).
This strategy alone can save you a few thousand dollars every other year. When
giving charity, consider donating appreciated stock or, if you are 70, giving
directly from an IRA.
6) Always weigh
the effect of putting money into an IRA. This could result in incredible
savings if you are receiving a health insurance premium tax credit.
7) Assess your
medical expenses and how to make them pre-tax. This is a mix of making your
premiums a fringe benefit and using HSAs and FSAs for out-of-pocket medical
expenses.
8) If you own a
business – even a part-time venture – there are many issues to discuss. Get
good advice on recordkeeping and careful tracking of your activity.
And for you
youngsters out there, keep a diary. You are living through history, and your
grandchildren will be asking questions one day.
Eli Pollock can be reached at elipollock2@yahoo.com.
