2020 tax year is going to be a hot mess, and coronavirus is why

WASHINGTON and the state where » Brace you work. But with so yourself: COVID-related many companies sending employees home to tax issues work to prevent the spread could trip of COVID-19, it’s possible you up in the many workers may end up coming year, paying taxes to two jurisdictions. resulting in a This could happen bill that you if you’ve moved, even can’t pay. temporarily, but your income Next year’s tax season is still derived from is going to be very confusing, work done for a company warns Erin Voisin, director located elsewhere. of financial planning Unless you instruct at California-based your employer to withhold EP Wealth Advisors. taxes for the appropriate

Some people who aren’t states, you could get an required to submit a federal unexpected tax bill, says return will find they Eileen Sherr, senior manager must file one if they want for tax policy and advocacy the $1,200 stimulus payment for the American promised under the Institute of Certified Public Coronavirus Aid, Relief, Accountants (AICPA). and Economic Security Working even one day (Cares) Act. Others filing in another state could trigger federal returns will have to taxation, Sherr said. account for decisions they The AICPA says 16 made to take advantage of states have reciprocity provisions in the Cares Act agreements with neighboring that offered relief for retirees jurisdictions that and penalty-free 401(k) exempt residents of a reciprocity withdrawals. state from income

Here are some tax issues tax withholding. Most that may impact your states will allow a taxpayer 2020 returns, due next to apply for a credit April. for income taxes paid to

TELEWORKING » Typically, another state. On its website, you pay taxes on income AICPA has a state earned in the state tax guidance chart for the where you permanently reside pandemic.

The Mobile Workforce Coalition has a useful website (mobileworkforcecoalition.org/problem) on the requirements to file personal income tax returns when traveling to a nonresident state to work.

It’s important that you know what your state income tax responsibility will be, Sherr said.

PAYROLL TAX » What the government giveth, it can take away. In the first few months of 2021, millions of workers could see a significant pay cut as companies recoup the COVIDrelated tax break Trump authorized in a presidential memorandum signed Aug. 8.

Starting this month, employers can temporarily stop withholding the payroll tax they impose on employees, according to guidance issued last week by the Treasury Department and IRS. The deferral lasts until the end of the year. Employees are taxed 6.2% of their income toward Social Security, which pays for retirement, survivor and disability benefits.

The payroll tax deferral will only affect employees who earn up to $4,000 every two weeks and less than $104,000 annually.

Unless Congress acts to forgive the deferred tax, the break could become a burden for a lot of people. From January through April, employers will have to recover the payroll money they didn’t withhold.

“Workers would owe the money, so it would be prudent to think through how they would pay it back and when,” said Edward Karl, AICPA vice president of taxation. “Setting the money aside is one option.”

Voisin recommends employees tell their employers to keep withholding the payroll tax. “People are going to have to be proactive,” she said. “They’ve really got to be thinking that this [tax] is going to be due again at some point.”

HOME OFFICE DEDUCTION » Yes, you’re working from your bedroom, but no, you can’t take a home office deduction. Employees are not eligible to claim the home office deduction even if an employer requires it because of COVID-19. The Tax Cuts and Jobs Act passed in 2017 eliminated employee business expenses on Schedule A. Independent contractors and the self-employed can still take a home office deduction.

“Will people try to take the deduction this year because of what’s going on? I’m sure,” Voisin says. “But you increase your audit risk if you do.”

REFUND OF 529 FUNDS » Concerned about the spread of COVID-19, colleges have reversed housing decisions and have sent students home. But if you used money from a 529 college savings plan to cover the cost of housing and food, you’ll need to put the money back to avoid paying income tax and a 10% penalty on the earnings.

A 529 plan allows contributions to grow tax-free. Here’s the issue for fall education expenses. You can’t keep the money, otherwise it’s considered a non-qualified distribution. You also can’t hold on to the money you took out this year to cover 2021 expenses. Distributions from a 529 plan need to match up with qualified expenses incurred during the same tax year. An account holder has just 60 days from the date of the refund to return the money to the 529 account without incurring taxes and the 10 percent penalty on earnings.

If you are returning the money to a 529 plan, be sure it’s characterized as a “recontribution” of a previous-qualified distribution. Also make sure that the amount you are recontributing is the exact amount of the refund.

“With all of the changes that 2020 has brought, we anticipate that come tax season for 2020, it will be a bit of a mess,” Voisin said.

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