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Questions About Your Taxes?

Check out the answers to frequently asked questions courtesy of Turbo Tax.

The Impact of Stimulus Payments on Your Taxes

Tax Tips for Unemployment Income If You’ve Been Laid Off or Furloughed

Your Top Tax Questions About Working Remotely, Answered

Tax Credits Are Often More Valuable Than Deductions

Five Hidden Ways to Boost Your Tax Refund

What is the Social Security Withholding Tax Deferral and What Does It Mean to Me?

I Was Temporarily Furloughed and Then Came Back to Work, What Does That Mean for My Taxes?

The Impact of Stimulus Payments on Your Taxes

What a year 2020 has been!

New Year’s celebrations were barely over when the coronavirus turned things topsy-turvy. But one bright spot for 159 million people was the $1,200 Economic Impact Payment that appeared in their mailbox or checking account.
If you didn’t receive a payment, you may be wondering, why? And if you did, you may be wondering, what’s the catch? We are here to help put your mind at ease, so let’s tackle your questions, one by one.

Do I owe tax on the money I received? That’s an easy one: No. The stimulus payment was designed to impact the economy, not your taxes, so it won’t reduce your 2020 refund or increase your tax due.

I didn’t get a payment – why? If your income for 2019 or 2018 was over $75,000 ($150,000 if you filed jointly, $112,500 if you were head of household), then your payment was reduced by $5 for every excess $100 you earned. And if you didn’t file a tax return for either year, you may not have gotten a payment. But don’t despair, you still may be entitled to payment.

Really? What can I do now? If you were supposed to file a 2019 tax return and didn’t, file right away. If your income was too low to file, at IRS.gov you can click on the tab marked “Non-filers” and fill in your basic information. If the IRS determines you are eligible for a payment, they will send it to you.

What if my income has gone down? If your 2019 income was too high for you to receive a payment, but your income this year is much lower, you are in luck. You can claim your stimulus payment on your 2020 income tax return, and it increase the refund you receive (or reduce any tax due).

My 2020 income is higher than in 2019 – will the government want the money back? No. If you received a stimulus payment based on lower income in 2019, that payment is yours to keep even if your income increased above the threshold in 2020.

When it's time to file your taxes TurboTax is here to help!
From simple to complex taxes, TurboTax® has you covered. And when you need help, real experts are standing by — and can even do your taxes for you, start to finish with TurboTax Live®. Getting your biggest possible tax refund has never been easier. And as a credit union member you can save up to $15 on TurboTax. Click here to get started today!

Tax Tips for Unemployment Income If You’ve Been Laid Off or Furloughed

If you lost your job or were furloughed this year, we are so sorry. If you were lucky, your company may have paid you furlough or severance. Either way, you likely applied for unemployment benefits, once you could get through on the busy, busy phone lines. And now, with tax time approaching, you may wonder if you owe taxes on the money you received, and if so, when and how you need to pay the tax.

Is my furlough pay or severance taxable?
Unfortunately, yes, any furlough pay and severance benefits from your employer is taxable, and your employer probably withheld taxes from that pay. The income and withholding will be included in the W-2 you receive in January. You’ll report the W-2 information on your tax return for 2020 and pay any taxes still due or, fingers crossed, claim a refund for overpayment.

I got laid off, do I have to pay tax on my unemployment?
If you received unemployment benefits you will owe federal income tax on those benefits, and you’ll receive a Form 1099G reporting that income to you. You may owe state income taxes as well, unless you live in one of the six states that don’t tax unemployment benefits (California, Montana, New Jersey, Oregon, Pennsylvania and Virginia), or one of the seven states that don’t have a state income tax.
Withholding taxes are not automatically taken out of unemployment benefits, so unless you opted to have taxes withheld anyway, no taxes were withheld. At this point some you are beginning to get the not-so-lovely picture. Taxable income received; no taxes withheld – uh oh! – taxes owed.

Isn’t the extra $600 federal benefit exempt from tax?
No, afraid not. The State unemployment benefits were boosted by a $600 per week Pandemic Unemployment Assistance supplement through June 2020. That supplement will be included in your taxable income on Form 1099G.

Here’s a small glimmer of hope
Your tax bracket will be low if your income for the year was low, which reduces the taxes you owe. But even if you don’t plan to file and pay until the April 15 filing deadline, consider preparing your tax return soon after the first of the year. That will give you a realistic picture of your tax situation plus a few extra months to find the money to pay the taxes.

Your Top Tax Questions About Working Remotely, Answered

Last spring, many of us were asked to leave the office and begin working remotely from home. If you were one of them, you know that presented a lot of issues to be solved as you juggled work and family, including children newly banished from their schools. It was a tumultuous time, and congratulations for dealing with it powerfully and creating solutions that worked for everyone. Whew!

Now, with tax time approaching, there are tax implications of working remotely that you need to address, and we are here to help. So, let’s take a look at the tax issues of remote employment.

What tax issues? I still pay tax on my income, right? Yes indeed. The income from your job will be reported to you on a W-2 in January, and you’ll report that income on your tax return. Nothing there has changed, at least for the federal tax return. But you may have special tax issues to deal with when you file your state income tax return unless you live and work in a state that has no income tax.

What’s different about state returns for remote employment? If you live in the same state in which your employer is located, state taxes are pretty straightforward. But when the pandemic hit and commuting to the office became a thing of the past, many people left urban areas and moved to the less-populated country where it was less expensive to live. If you crossed state lines to do that and now live in a different state from your former office, you may be dealing with the income tax rules of two states, not just one.

Oh no, do I owe taxes to both states? Good question – it depends. Most states look to your physical presence in determining whether to tax you. If that’s the case, if you live and work in one state for an employer in another state, you will only owe tax to the state in which you live and work. But each state is different, so be sure to use tax preparation software such as TurboTax® that considers the facts and circumstances of your employment situation in light of the tax laws of the states involved.

Can I deduct the costs of working from home, such as my computer, internet, office furniture, and supplies? Probably not. Unfortunately, the tax act passed at the end of 2018 axed those deductions for most employees, with the exception for teachers that allows them to deduct up to $250 for supplies used in the classroom. If you aren’t entitled to a deduction for your expenses, your best bet is to ask your employer to give you a non-taxable reimbursement for those costs.

When it's time to file your taxes, TurboTax® is here to help!
From simple to complex taxes, TurboTax has you covered. And when you need help, real experts are standing by — and can even do your taxes for you, start to finish with TurboTax Live®. Getting your biggest possible tax refund has never been easier. And as a credit union member you can save up to $15 on TurboTax. Click here to get started today!

Tax Credits Are Often More Valuable Than Deductions

If you are confused about the difference between a tax deduction and a tax credit, you are not alone. A deduction is subtracted from your income, lowering your taxable income and your income tax. But a tax credit kicks in after you have computed your income tax, reducing that income tax dollar-for-dollar.

You must choose between taking a standard deduction or itemizing your deductions. Since the standard deduction is now $12,400 per taxpayer, even more for seniors over 65, it won’t benefit most people to itemize unless they have a hefty home mortgage or huge medical expenses.

But even if you take the standard deduction, there still are a few deductions you can claim and many credits for which you might qualify. Here are some of the more popular ones.

Student loan interest deduction. You can deduct up to $2,500 of student loan interest if your income is less than $85,000 on a single return (double that if filing jointly.)

Educator expenses deduction. School teachers can deduct up to $250 they spend on classroom supplies.

HSA contributions deduction. For 2020, if you have high-deductible health coverage, you can contribute up to $3,550 to a Health Savings Account to pay for medical expenses ($7,100 for family coverage).

Retirement plan contributions. You may have a traditional 401(k) or other retirement account available to you at work, and all your contributions to the plan are tax-deductible up to $19,500 ($26,000 if you are 50 or older). Contributions to traditional IRAs or other individual retirement accounts are also deductible. You may also qualify for a Saver’s Credit of up to 50% of your first $2,000 in retirement plan contributions if your income is under $32,000.

Education tax credits. If you are paying for college for yourself or your kids, the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit LLC) may help. The AOTC credit is 100% of the first $2,000 you spend on education and 25% of the next $2,000. The LLC lets you claim 20% of the first $10,000 you paid toward tuition and fees. The AOTC cuts off at $90,000 of income at the LLC at $69,000.

Child credits. You’ll get a Child Tax Credit of $2,000 per child ($500 for non-child dependents) if your income is under $200,000 ($400,000 on a joint return.) For child and dependent care costs, you’ll get a credit of 20% to 35% of the first $3,000 of care costs, or double that if there are two or more dependents. If you adopt a child, you can claim credit for up to $14,300 of adoption costs per child if your income is under $254,520. And if your income is under $57,000, you may also qualify for an Earned Income Tax Credit of up to $6,660 depending on your marital status and how many kids you have.

Residential energy credit. If you installed solar equipment this year, you may qualify for a tax credit of 26% of the cost. In 2021, the final year, the credit is reduced to 22%.

COVID-Related Distributions from 401(k) Plans - How will it impact my taxes?

The coronavirus certainly threw a monkey wrench in our finances this year, didn’t it? But there is some relief, if you or a household member lost their job, were furloughed, or had their work hours cut. A special provision of the Coronavirus Aid, Relief and Economic Security (CARES) Act lets you take up to $100,000 from your 401(k) or other retirement account before the end of 2020 without penalty. Here is the fine print for who qualifies, and from which accounts you can draw the money:

You, your spouse, or your dependent is tested and diagnosed with COVID-19.
You, your spouse, or a household member suffers financial hardship as a result of being quarantined, losing your job, having your hours or pay reduced, or having a job offer rescinded or delayed. And being unable to work because of lack of childcare counts as well.
You, your spouse, or household member closes their business or reduces business hours due to COVID-19.
Almost all retirement plans qualify for this temporary relief from penalties on early withdrawals, including all IRAs (traditional, Roth, SEP, SIMPLE, and SARSEP IRAs), 401(k) and 403(b) plans, pension and profit-sharing plans, governmental 457(b) plans, federal Thrift Savings Plans and 403(a) plans.

If you had a retirement stash you could draw from, this provision may have been a lifesaver for you. But now that tax time is around the corner, it’s time to start thinking about the tax consequences of those withdrawals.

Wait, I thought the withdrawals were tax-free! Not quite. You don’t owe the 10% penalty for early withdrawal, but that doesn’t mean the distribution came to you scot-free. If your contributions to the retirement account were tax-deductible (what’s known as “before tax dollars”), then withdrawing the funds may have triggered tax.

But here’s the good news: it’s up to you as to how much is taxable and when that tax is due. Under the CARES Act the income from withdrawals is spread over a three-year period. So, if you received a $9,000 distribution, you would report $3,000 in income on your federal income tax return for each of 2020, 2021, and 2022. But if your income is super-low this year, you can elect to have it all taxed in 2020 at this year’s lower tax rates. Want to escape current taxation altogether? Repay the distribution within three years and you won’t owe income tax on the portion repaid.

Five Hidden Ways to Boost Your Tax Refund

Tax time is just around the corner. Wouldn’t a big fat tax refund come in handy? Well, here are steps you can take now to boost your tax refund when you file after the first of the year.

Itemize your deductions. The standard deduction is $12,400, so it’s tempting to claim it rather than tracking down receipts and tax forms so you can itemize your deductions. But itemizing might be worth it if you are a homeowner with a sizeable mortgage, gave money and “stuff” to charity, or paid points when you took out your mortgage. If you are an educator, you can deduct up to $250 of school supplies even if you don’t itemize deductions. Start gathering information right away so you’ll have everything ready at tax time.
Claim education expenses. If you are paying college expenses for yourself, your spouse or a child, two education credits can help defray those costs, the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC). The AOTC is a partly reimbursable credit for 100% of the first $2,000 of education expenses you pay and 25% of the next $2,000. The Lifetime Learning credit (LLC) is 20% of the first $10,000 of education expenses. The AOTC is eliminated once your income exceeds $90,000 and the LLC at $68,000. There are other differences as well, so weigh your options carefully in deciding which credit to claim. Start gathering the data you’ll need to claim the deduction, and consider prepaying tuition or other costs to get the maximum credit possible.
Claim credit for your “full house”. If your adult children, their significant others and friends have come to live with you, you may be eligible to claim a $500 tax credit for non-child dependents you support if their income is less than $4,300. You can claim the credit for parents you support, even if they don’t live with you. Stick a note into your tax file (you do have a tax file, don’t you?) reminding you to look into claiming these credits at tax time.
Contribute to tax-deductible retirement accounts. This is a way to save for your future and boost your tax refund. If your income is under $65,000, you may qualify for a Saver’s Tax Credit as well. That’s three different benefits from the same action. Make contributions to your 401(k) by the end of the year. Though you have until the tax filing deadline to contribute to an IRA, if you are claiming the Saver’s Tax Credit, do that by year end as well.
Deduct worthless investments. If you have any investment that went belly-up, sell it before the end of the year and claim a tax loss. If someone owes you money that you can’t collect, you can claim that as a bad debt deduction as well. Write a description of the debt that includes the name of the debtor, the amount and the date the debt was due, and any relationship between you and the debtor. Describe the efforts you made to collect, and why you think the debt is now worthless.

Here’s a bonus tip: File your tax return on time. You won’t get a tax refund until you file your tax return. But really, even if you aren’t required to file a tax return because your income is low, file anyway to claim your refund for taxes withheld and any refundable credits you are entitled to. If you wait more than two years to file, the IRS will not issue you a refund.

What is the Social Security Withholding Tax Deferral and What Does It Mean to Me?

Most employers are required to withhold 6.2% in Social Security tax from their employees’ pay and submit it plus a matching amount to the government. But in August President Trump signed an executive order allowing employers to temporarily suspend withholding the Social Security for September through December 2020. The suspension only applies to employees whose bi-weekly pay is under $4,000.

The suspension wasn’t a payroll tax reduction, it was a deferral. Any employer who opted to implement the suspension had to collect the suspended tax from their employees in January through April of 2021 and remit the deferred taxes to the government by April 30, 2021.

Many employers decided not to implement the tax suspension amid concerns over collecting deferred taxes from employees who might no longer be on the payroll in 2021 and other logistical issues. But if your employer did opt to suspend collecting Social Security withholding taxes, here are some things you should know.

The suspended tax will be withheld from your paycheck evenly from the beginning of the year through the end of April. That withholding is in addition to the normal Social Security tax withholding from your paycheck. So not only will the 6.2% withholding begin again on your current wages, a similar amount will be withheld for the suspended taxes. That could means a cut in your net pay of 12.4% or so. Ouch!
Consider setting funds away in savings now that you can use into after the first of the year to make up for that dip in your net paycheck.
If you leave your job before next April, be prepared to see all the deferred payroll taxes deducted from your final paycheck.
If you get a bonus that increases your bi-weekly gross pay to over $4,000, that paycheck will not be eligible for the payroll tax deferral and your employer will take Social Security taxes out of the wages and bonus in that particular paycheck.

I Was Temporarily Furloughed and Then Came Back to Work, What Does That Mean for My Taxes?

Whether you are furloughed, laid off or fired, it hurts. It’s a blow to your ego, and losing a regular paycheck is a blow to your finances. Fortunately, for many it was temporary, and after the initial weeks and months of the pandemic they were able to go back to work.

If you were furloughed and your paycheck continued during your furlough (lucky you!) then your finances and taxes didn’t change much. But if you had a gap in pay, with a corresponding gap in taxes withheld, what does that mean for your overall tax picture for 2020?

If you received unemployment benefits during the period you weren’t working, those benefits are taxable, but income taxes weren’t withheld unless you made a special request. As a result, the taxes on those benefits are due when you file your tax return in the spring or will reduce the amount of your tax refund.

Speaking of refunds, the amount of your refund depends on how much was taken out of your paycheck for income taxes compared to the actual taxes on your tax return. If you had more taken out than the actual taxes, you are due a refund of the difference. But during the weeks or months you weren’t receiving a paycheck, nothing was taken out. That will result in a lower refund at 2020 year end.

There is one ray of sunshine in all of this. Our system of income taxes is graduated, with higher rates applying to higher income. If your income dropped for 2020, your tax bracket may have dropped as well, and that could increase your refund a bit. And now that your income is lower, that could make you eligible for tax credits that didn’t apply to you before, such as the Earned Income Tax Credit.