The extension adds a bit of relief around the coronavirus pandemic during tax season, but it certainly doesn’t make things any less complex. Because of the uncertainty and rolling finish lines for so many COVID-19 initiatives, filing your taxes may look a bit different this year.
Here are how four common claims and deductions may be impacted for you.
If you’re an employee at a company, you used to be able to claim an itemized deduction for unreimbursed business expenses, which included the business use portion of your home. That deduction was eliminated with the 2017 tax reform law, so employees can’t claim the use of a home office on their taxes, even if they’ve been working from home throughout the pandemic.
Some companies have offered (or continue to offer) stipends or other reimbursements for employees. Employers may also provide home office deductions for employees; the employer would look at the portion of the home that’s used only for business purposes and deduct it as an expense. As an employee, you’d need to provide receipts of usage and deduction, but that money wouldn’t be taxed.
Ask your employer if they can offer any kind of relief for the use of your home office. Though you’re saving money on your commute, you’re still incurring additional expenses you wouldn’t otherwise, such as additional power and water usage, printer ink and toner and other office supplies.
If you’re self-employed, you can deduct office expenses on Schedule C (Form 1040), whether you work from home or elsewhere.
However, you can also deduct home office use — which includes rent, mortgage interest, insurance, utilities depreciation and any repairs you made — if you satisfy two requirements from the IRS:
- You must use a portion of the home “regularly and exclusively” for conducting business.
- The home must be your principal place of business.
If you were working remotely for, say, six months of the year, you can only claim the deduction for those six months. You can calculate the deduction in one of two ways:
- “Simplified” option: Deduct $5 for every square foot for business use of the home. This method has a maximum of 300 square feet, or $1,500.
- “Regular” option: Deduct based on the percentage of the home devoted to business usage. For example, if you have a 1,500-square-foot home and use 10% of it for business, you’d multiply by .10 to determine your indirect expenses deduction. Direct expenses, like a repair or new paint job inside your home office, are fully deductible.
The IRS doesn’t care what kind of “home” you have either. Apartment, single-family home, townhouse, condo or sprawling mansion — they all count. You can even claim the home office deduction if you work from another unattached building on your property, like a shed or studio.
Finally, if you have a side hustle, you can claim deductions for business expenses and the home office deduction for your side business(es), assuming you meet the above requirements.
In a typical year, employees could be reimbursed any mileage driven outside of typical work commutes. A trip from the office to a business meeting or running company errands could be claimed, as would driving from your home to an off-site staff training. However, driving from your home to the office would not be reimbursed.
If your office has continued to operate as normal during some or all of COVID-19, these same rules apply. It’s possible you likely worked from home, though — overall, driving mileage was down by 14% in 2020, with the pandemic playing a major role in that decrease.
So in those cases, what qualifies as business use of your car in remote-work settings?
A lot of the same rules still apply, in fact. Going from home to office still wouldn’t be deductible. But did your company move office supplies to a storage locker that you could use as you please? You could be reimbursed for driving to that storage locker.
If you go to work at a coffee shop, you can’t be reimbursed for driving there. But did you meet someone and talk business? Go ahead and claim that mileage as business use (and your coffee counts as a tax-deductible business expense, too).
The IRS has a full list of when you may deduct travel, gift and car expenses — which includes additional driving-related expenses like parking or meals — so be sure to consult it before reporting anything on your taxes.
You can choose to calculate your actual business use expenses or the standard mileage rates. The standard mileage rates for 2020 (and 2021) are:
- 57.5 cents per mile driven for business use (56 cents in 2021)
- 17 cents per mile driven for medical, or moving purposes if you’re an active duty member of the Armed Forces (16 cents in 2021)
- 14 cents per mile driven for charitable organizations services (14 cents in 2021)
The Consolidated Appropriations Act extended certain tax benefits, including several around driving. For example, you can include qualifying 2021 expenditures for up to 30% of the cost of installing non-hydrogen alternative fuel equipment for an electric vehicle.
As with home office expenses, your employer may offer vehicle or driving reimbursements or allowances. Certain states require employers reimburse their employees for business use of a personal car, while others may offer a stipend as a good faith gesture.
If you’re self-employed and don’t typically have an office anyway, you can consider trips from your home if they’re related to your business. For example, a freelance writer could claim the mileage from driving to interview someone or visiting a store to purchase a new laptop hard drive.
Before 2020, charitable contributions could only be deducted if you itemized every donation alongside your qualified expenditures and those expenditures exceeded the standard deduction, which is $12,400 for single taxpayers and $24,800 for married couples.
However, thanks to the Coronavirus Aid, Relief and Economic Security (CARES) Act, taxpayers can now take a charitable contribution deduction of up to $300 for both single and married filers.
This deduction can be claimed even if you don’t itemize, but you’ll need to keep records of the donations. And the contributions only count with cash, check, credit card or electronic payment.
That means a $50 donation to your favorite charity can be claimed, but donating books to a school or clothes to Goodwill cannot.
It’s a good idea to regularly contribute to a retirement fund. That money is gaining interest, your employer may match up to a certain amount, and you’ll have a nice nest egg for when you retire.
However, during the COVID-19 pandemic, many people found it necessary to dip into their retirement funds. You may have needed to pull some money to cover medical expenses or help a family member who lost their job.
The IRS charges a 10% penalty if you withdraw from an individual retirement account (IRA), 401(k), or other qualified retirement account before age 59.5. However, under the CARES Act, you can forgo that penalty if you withdrew for coronavirus reasons.
If you’ve experienced financial consequences due to being laid off or having your work hours reduced, couldn’t work because you didn’t have child care, or you or your spouse was diagnosed with COVID-19, you’ll count as a qualified individual.
The CARES Act allows you to spread out taxes on that money over three years. Normally, if you withdrew $6,000, you’d owe taxes on that money all in one year. In this situation, you can instead choose to pay $2,000 per year in 2020, 2021 and 2022.