5 Tax Tips in Times of Uncertainty
Follow these tax tips and insights meant to help homeowners navigate the post-coronavirus economy.
As the economic fallout from coronavirus continues to plague the nation, millions of Americans face job loss, concerns over long-term investments, and questions about how they’ll pay their bills. Some relief is on the way from the $2 trillion federal stimulus package signed into law. But how these financial concerns play out in the long run remains to be seen.
During this time of great uncertainty, tax policy plays an important role in everyone’s personal finances. As a homeowner, it’s a good idea to keep up with changes.
Here are five tips to help you out.
1. Tax day is now July 15, but consider filing sooner
The 2020 tax deadline has been delayed by the federal government from April 15 to July 15, 2020. Most states moved their own deadlines as well.
This means you need to file your taxes before July 15. This is also the deadline to pay any 2019 taxes you owe. If you need more time, you can request an extension to Oct. 15, 2020.
Despite the extra time, consider filing as soon as you can, especially if you know you’re getting a refund. The average federal refund is about $2,900.
If you’re strapped for cash because you’re out of work or your job security is uncertain, file ahead of time so you have this money at your disposal. The government processes most refunds 21 days after filing.
2. Assess your investment portfolio before the close of 2020
The COVID-19 crisis caused the biggest ever one-day drop in stocks and the highest percentage decline since the Black Monday crash of 1987. The Dow Jones Industrial Average fell almost 3,000 points (about 13 percent), and the S&P 500 fell 12 percent. Overall, the Dow dropped 23% in the first three months of 2020, its worst first quarter in history.
As a result, your retirement funds, including index, IRA, and 401(k) accounts likely took a hit. Whether you’re checking your accounts obsessively (or not at all), go back to your portfolio before the tax year ends, in Dec. 2020.
If your assets have significantly gone down and don’t recover by December, you may want to use these losses for tax purposes. In the tax world, the term for this strategy is tax-loss harvesting. This means that investments in the red can be your ticket to a lower tax bill of up to $3,000 for the year.
Tax-loss harvesting helps everyday investors minimize paying capital gains by offsetting the amount they claim as income. You “harvest” investments to sell at a loss, then take that loss to lower or potentially eliminate the amount of taxes you have to pay on gains you made during the year.
3. Consider work-from-home deductions
With shelter-in-place now in full effect in many states, millions of employees are now working from home. You can make certain tax deductions if you’re working from home, and it may lower your tax bill for next year.
Here’s what you need to do:
- Keep track of the days you’ve worked from home. You can do this by noting your WFH (work from home) days on your calendar.
- Have a separate home office area that you designate as your work space. According to the IRS, it must be separated from the rest of your home and only used for working purposes.
- Document and keep records of any work-related expenses. If you’re working from home for an extended amount of time, you may want to check with your tax accountant to find out if you can deduct a portion of your utilities (Wi-Fi, electricity, cell phone) mortgage interest, property taxes, or homeowners insurance.
4. Assess your medical and HSA deductions
Just like your home office deduction, keep track of how much you pay for medical needs. You can claim medical expenses on your tax returns.
Generally speaking, you can deduct qualified medical expenses (if you were not reimbursed) that are more than 7.5 percent of your adjusted gross income in 2019.
If you or your dependents were in the hospital or had costly medical or dental expenses, keep those receipts. These costs may help cut your tax bill. Keep in mind you’ll have to itemize these costs instead of taking the standard deduction. If the standard deduction is more than you itemized, take the standard deduction to save yourself time.
Due to COVID-19, the IRS announced that those who have high deductible health plans (HDHPs) can pay for coronavirus testing and treatment without affecting their status as an HDHP.
This means you can do the following:
- Cover the cost of testing before plan deductibles have been met
- Continue to contribute to your health savings account (HSA)
- Deduct the HSA contributions on next year’s taxes
5. Adjust your calendar and watch for policy changes
It’s a stressful time, so to get organized, use your calendar and note the new July 15, 2020 deadline. Schedule time with your tax professional now so you can talk through issues you’re concerned about.
Even if you plan on requesting an extension, you still have to pay whatever you owe by July 15, 2020. If you don’t, you may receive penalties and interest charges from the IRS.
In the meantime, federal and state governments will continue to update the public on changes to policies regarding the coronavirus pandemic. Keep yourself updated by checking the official IRS Coronavirus page. Here are some tax-related developments to stay aware of:
- State tax deadline extensions
- Potential additional stimulus bills from Congress
- Changes to property tax deduction rules
- Stimulus eligibility based on tax returns
- Landlord tax deductions
- Rules changes and tax implications of mortgage payment relief