By Christina Lee Knauss
When March rolls around, so does the height of tax season, and those who didn’t get their returns filed early start preparing — and stressing out — with only a little over a month before the filing deadline.
This year’s tax season, like the two previous ones, also looks a little different because of the ongoing financial effects of the COVID-19 pandemic.
For workers and employers alike, there are some new rules to know that will only be in effect for the 2021 tax season because of the pandemic, and there are also some key things to remember to avoid getting flagged for an audit.
One of the most important things to remember this year? The Internal Revenue Service is hurting, still plagued by chronic staffing shortages causing serious backlogs in processing returns. In some cases, taxpayers are still waiting for stimulus payments and refunds from the 2020 filing season.
And good luck trying to call with a question. The U.S. Treasury has said that over the past two years, up to 20% of its customer service employees have been unavailable because of COVID-19. How bad was it? During the first half of 2021, the IRS estimated there was one employee available for every 16,000 phone calls that came in.
As a result, the IRS is begging taxpayers to do everything possible electronically, from filing returns to getting answers to tax questions at the IRS.gov site. (And no, you no longer will need to upload a selfie in order to access your online IRS account.)
“File as early as you can, file electronically and make sure you link up your bank account so your refund can be direct deposited,” said Bryan Cannon, CEO and chief portfolio strategist for Charlotte-based Cannon Advisors. “People that don’t do those three things are going to experience some delays.”
For this filing season, IRS.gov has added several new features available 24 hours a day, including a special tax season alert page updated daily and a tool called “Understanding Your IRS Notice or Letter.” It also has special resources on the expanded tax benefits from the American Rescue Plan including: the expanded Child Tax Credit; increases in the Child and Dependent Care Credit and Earned Income Tax Credit; and the Recovery Rebate Credit, which allows eligible taxpayers to claim the full amount of any missed 2021 stimulus payments.
“We want taxpayers to know that IRS.gov is a deep well of easily accessible material that is constantly updated,” said Stacy Engle, an IRS spokesperson. “Online tools and assistants can clarify an IRS letter you’ve received, track your refund and give you details on what tax benefits you may qualify for.”
This tax season also brings with it some special pandemic-related changes to filing rules and some issues that taxpayers and employers need to know about, Cannon said, including:
- Unemployment income: Because so many people lost jobs when the pandemic hit, taxpayers who had to file unemployment got a break for 2020. For that year only, up to $10,200 in unemployment income was tax-free for those who made up to $150,000 a year. For 2021? Sorry, all unemployment income is taxable again.
- Advanced Child Tax Credit Payments: The American Rescue Plan Act of 2021 increased the amount of the tax credit a taxpayer could receive for each dependent child, to $3000 for each child ages 6 through 16 and $3,600 for each child under 6. The act also enabled the Advanced Child Tax Credit, which for the second half of 2021 disbursed monthly payments equal to half of the total child tax credit a taxpayer would be able to claim for 2021. Those advance payments are not taxable and don’t need to be reported as income, Cannon said.
- Employee Retention Tax Credit: This is a tax credit for employers enacted in 2020 as part of the CARES Act, designed to reward business owners for retaining employees during the pandemic.
“It was available to all employers regardless of size,” Cannon said. “It was there if you were ordered to shut down, like what happened to restaurants or gyms, or if you had a significant drop in income compared to the previous year.”
To qualify for the credit in 2021, businesses had to be forced to partially or fully shut down operations because of local government restrictions related to the pandemic or had to experience an 80% reduction in receipts from the prior year. For 2021, the maximum amount businesses can claim is $7,000 per employee for the first three quarters of the year.
- Home office deductions: If you were forced to work at home by the pandemic, you might wonder if you can deduct expenses for setting up a home office. The answer? Not if you file a W2, meaning you receive wages or a salary from a company. After changes to the tax rules through the Tax Cuts and Jobs Act of 2017, only contract employees or sole proprietors can claim home office expenses as a deduction.
“If you’re producing W2 income and you deduct home office expenses, you’re going to get flagged,” Cannon said. “People took a lot of liberties with that deduction, and in some cases sorely abused it, so now there’s no deduction if you file a W2.”
The best-case scenario for those who file W2s is if your employer provided the equipment to allow you to set up a home office or agreed to reimburse you for any equipment you had to buy.
And finally, the most important thing to remember for tax season: The deadline for filing for most Americans is April 18. For those who live and work abroad, it’s June 15. If you need more time, you can get an automatic extension until Oct. 17.