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Expanded Educator Deduction for COVID-19 Safety

The educator deduction for out-of-pocket classroom expenses started as a temporary tax law provision in 2002. Primary and secondary schoolteachers could deduct up to $250 of the unreimbursed cost of books, supplies, computer equipment, and supplementary materials used in the classroom. In 2015, the deduction was made permanent. In 2016, the deduction was expanded to cover professional development expenses and was indexed for inflation.

Even with indexing for inflation and before the pandemic, $250+ a year did not put much of a dent in teacher spending. COVID-19 safety needs have made classroom expenses spike, just like other work environments. In June 2020, AdoptAClassroom.org surveyed U.S. educators to ask about classroom expenses during distance learning. It was not shocking to learn that teachers spent an average of $745 for classroom supplies in the 2019-20 school year. Almost half of the responding teachers reported spending more because of distance learning. 

The COVID-related Tax Relief Act of 2020 expanded the educator deduction further to help teachers afford the challenges of distance learning and returning to the classroom. Here’s what you need to know about the expanded educator deduction:

  • Who is Eligible for the Deduction?

You’re an eligible educator if, for the tax year you’re a kindergarten through grade 12 teacher, instructor, counselor, principal, or aide for at least 900 hours during the school year. Services must be performed in a school that provides elementary or secondary education as determined under state law.

  • What Safety Items Qualify?

COVID-19 protective items include, but are not limited to face masks, disinfectant, hand soap and sanitizer, disposable gloves, physical barriers like clear plexiglass, air purifiers, and other items recommended the Centers for Disease Control and Prevention for the prevention of the spread of COVID-19.

  • When Can Safety Items be Included?

Qualified expenses include the amounts that you pay or incur after March 12, 2020, for personal protective equipment, disinfectant, and other supplies used for the prevention of the spread of coronavirus. The deduction is for expenses paid or incurred during 2020 are deductible on your 2020 federal tax return.

Still not sure if you or someone that you know is eligible for the expanded educator deduction for COVID-19 safety items? Read more details at https://www.irs.gov/taxtopics/tc458.

Taxes for Married Couples in Businesses

Married couples who also operate a business together live a complex life. Commingling personal and business, experiencing 100% togetherness, is tough enough. Throwing taxes into the mix could be the straw that breaks the proverbial camel’s back and busts that togetherness apart. But it doesn’t have to be that way.

By default, according to the IRS, two or more individuals in business together without incorporating operate as a partnership. Partnerships are a complicated way to operate from a tax perspective. Partnerships file a separate income tax return, and each partner receives a Form K-1 to report for her or his pro-rata share of income and expenses, used to prepare the partner’s individual income tax return. Partners must also track the basis of partnership interest and any loans to or from the partnership, which impacts how distributions are taxed.

Married couples can get an exception to all those partnership complexities, if each spouse is an owner and materially participates in operating a business that is not formed as a Limited Liability Company (LLC). Instead of a partnership, spouses can elect to treat the business as a joint venture. The joint venture election breaks down to four simple steps:

  • Make the Qualified Joint Venture Election by filing a joint individual tax return. Spouses must consider profits and losses based on spouse’s interest and level of material participation in the business. Once the election is made, if the spouses receive an IRS notice asking for a partnership tax return, they should call or write to the IRS advising them of the qualified joint venture election.
  • Divide Profit and Loss between Spouses by dividing all items of income, gain, loss, deduction, and credit between them in accordance with each spouse’s level of material participation in the joint venture. The percentage allocation should be consistent for all items and reflect the relative percentage of participation. Allocations should be documented and updated for any changes in participation.
  • File Two Separate Business Schedules on the spouses’ individual income tax return. Each business schedule (i.e., IRS Schedule C or Schedule F) should be prepared with each spouse’s allocated share of income and expenses. The net profit or loss for the business schedules for each spouse is combined and reported on Form 1040, Schedule 1, Line 3. Net combined profit or loss is included in overall total income.
  • Report Net Profit as Self-Employment Income so each spouse’s earning from self-employment are credited and the applicable self-employment taxes are paid. Spouses who elect qualified joint venture status are treated as sole proprietors for federal tax purposes. A separate Schedule SE to report self-employment tax must be filed for each spouse to accurately report the net self-employment income.

Need more details about simplifying tax complexities when you are running a business as a married couple? The IRS has it for you here – https://www.irs.gov/businesses/small-businesses-self-employed/election-for-married-couples-unincorporated-businesses.

Beware of Scams During Tax Season

Scam artists prey on their victims all year long, but scam activity seems to spike during tax season. It must be “prime time” to snare victims because they are more abundant – everyone is preparing and filing their returns to meet the April 15 deadline. Scammers can’t resist all those opportunities to fool or intimidate taxpayers who are in the middle of an unpleasant task that makes them nervous and vulnerable, especially online.

Since 2014, the IRS has announced its “Dirty Dozen” top tax scams. The top twelve for 2020 include five scams that are more likely to occur during tax season, targeting taxpayers with malicious intent to steal their refunds, bank account number, or personal information. Here are alerts to watch out for on the five tax-related scams highlighted by the IRS:

  • Phishing: Taxpayers should be alert to potential fake emails looking to steal personal information. Don’t click on links claiming to be from the IRS, or any other sender you’re not expecting or that you do not know. Be wary of emails with embedded links or invitations to see or learn more − they may be nothing more than scams to steal personal information.
  • Unscrupulous Return Preparers: Most tax professionals provide honest, high-quality service, but dishonest preparers pop up every filing season. They commit fraud, harming innocent taxpayers, or talk taxpayers into doing illegal things, like inflating deductions. These scammers may also have taxpayers deposit refunds into tax preparer accounts.
  • Offer in Compromise Mills: Misleading tax debt resolution companies can exaggerate the chance to settle tax debts for “pennies on the dollar” through an Offer in Compromise (OIC) for a hefty fee. Later, the taxpayer learns that she or he is not one of the small number of individuals who are qualified to even apply for an OIC, after the fee is paid and it’s too late.
  • Fake Charities: Criminals frequently exploit natural disasters and other times of crisis by setting up fake charities to steal from well-intentioned people trying to help in times of need. Unfortunately, this is nothing new. The current COVID-19 pandemic and recent winter storms in Texas are examples where scammers take advantage of your compassion.
  • EIP or Refund Theft: Refund fraud and theft remain a pervasive threat. In this past year, criminals also turned their attention to stealing Economic Impact Payments (EIP) as provided by the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Scammers often defraud taxpayers by promising payments more quickly but divert the payments instead.

Don’t get caught up in one of these top tax scams while you are busy filing your 2020 income tax returns. To learn more about these scams and how to protect yourself, check out the IRS website at https://www.irs.gov/newsroom/irs-unveils-dirty-dozen-list-of-tax-scams-for-2020-americans-urged-to-be-vigilant-to-these-threats-during-the-pandemic-and-its-aftermath

Residential Energy Tax Credits Extended

If you didn’t get all your home improvements done in 2020, and you think you missed out on some valuable residential energy tax credits, you’re in luck. Some renewable energy tax credits were extended. Others are still available at a lower rate. Even better, some tax credits were retroactively extended back to 2018. That could mean money back on your 2018, 2019, 2020, and, in some cases, your 2021 income tax liability.

Energy tax credits are an incentive for homeowners and builders to make energy-efficient improvements or upgrades that use less energy and protect the environment. For example, ENERGY STAR certified products are independently certified to use up to 30% less energy. Less energy use means a lower energy bill. It could also mean your lowering your taxes.

Here are six tips about Residential Energy Tax Credits:

  • Renewable energy tax credits are 22% of the cost for solar energy systems, fuel cells, small wind turbines, and geothermal heat pumps that are placed in service during 2021. Tax credit limits depend on the credit amount and your tax situation.
  • Residential Energy Property Tax Credits have been retroactively extended for qualified improvements from December 31, 2017, through December 31, 2021. These credits are generally 10% of the cost, up to $500, or a specific amount from $50-$300, depending on the improvement.
  • Improvements that qualify for the Residential Energy Property Tax Credit include qualified heat pumps, central air, boilers, furnaces, water heaters, circulating fans, and biomass stoves.
  • Qualified energy efficiency improvements that also qualify for a residential energy credit include energy-efficient insulation, metal and asphalt roofing, windows, doors, and skylights. The credit does not include the installation cost.
  • Energy credits apply to your newly-constructed or existing home that is used as your primary residence or your secondary home. These credits do not apply to rental properties.
  • You can take advantage of retroactively-extended energy tax credits by amending your federal income tax return up to three years after the original filing deadline (e.g., April 15, 2021, for a 2017 income tax return originally due April 15, 2018).

Home improvements that save on your energy costs could also lower your tax liability. Not only could 2020 improvements qualify for a tax credit, some of the qualified home improvements you made in the last three years could lower your prior-year tax liability, too. Want to know more? Check out the ENERGY STAR website https://www.energystar.gov/about/federal_tax_credits.

Final Worker Classification Rules

Lawsuits about worker classification weren’t front-page news before Uber and Lyft started fighting traditional interpretations of the law by treating workers as independent contractors. What used to be boring hiring details are big headlines about big-name court cases fighting over whether workers are employees or independent contractors. And, as you can imagine, worker classification issues have gotten bigger as the gig economy has exploded.

Uber, Lyft, and other businesses that provide apps for gig workers fought and won legal battles to classify those workers as independent contractors, not employees. Using the independent contractor classification saves businesses money in employer payroll taxes and other employee-related expenses. Workers classified as independent contractors assume more responsibility and cost, like paying self-employment taxes and making quarterly tax payments.

Recent court rulings about worker classification have created some confusion among employers. The U.S. Department of Labor (DOL) stepped in to help businesses and workers comply with applicable tax law. DOL recently issued a final rule that takes effect on March 8, 2021, to clarify the standards for determining whether a worker should be considered an employee or an independent contractor.

Three aspects of the final DOL rules that businesses and workers should know:

  • An “economic reality” test is used to determine whether a worker is an independent contractor or is “economically dependent on an employer for work” (i.e., an employee). The rule defines two “core factors” to help businesses determine whether a worker is economically dependent on someone else’s business or is in business for her- or himself.
  • The first of the two core factors isn’t just one thing; it relates to a series of conditions. These include the degree of control of the employer over the work, the amount of skill required to perform the work, and the degree of permanence of the working relationship. For example, an independent contractor is free from the control and direction of the hirer, is sufficiently skilled to work autonomously, and is providing services that are temporary or intermittent.
  • The second core factor relates to whether the work being performed is integrated with or separate from the overall business. An independent contractor performs work that is outside the usual course of the hiring entity’s business, either a specialized skill or temporary need for additional resources.

Worker classification issues have gotten bigger, along with the expansion of the gig economy. Determining whether a worker is considered an independent contractor or an employee can be complicated, which is why DOL issued clarifying rules. Worker classification decisions assign responsibilities and costs to the employer or the worker, so it’s important to get it right.

Need more information? The IRS addresses worker classification at https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-or-employee.

2021 Tax Filing Starts February 12

Tax filing season officially starts for individuals on Friday, February 12th, when the IRS begins accepting and processing 2020 income tax returns. Ordinarily, tax filing starts in the third week of January. However, with all the last-minute tax changes in 2020, including a second round of Economic Impact Payments, the IRS needed extra time to update its systems.  

The IRS has already started begun accepting business returns and individual returns from taxpayers who are eligible to use IRS Free File partners (https://www.irs.gov/filing/free-file-do-your-federal-taxes-for-free). The IRS anticipates that nine out of ten taxpayers will receive their refund within 21 days of filing electronically if there are no issues with the tax return.

The IRS has five tips to avoid having issues with your return:

  • There is no extension of the April 15 tax filing deadline. If you need more time to file, you can extend filing until October 15, by filing Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return. But remember, it’s an extension of time to file, not to pay. Pay any taxes due with the extension request, no later than April 15.
  • Taxpayers are urged to file returns electronically as soon as they have the 2020 tax documentation that they need. Filing early is a good idea for several reasons. First, processing volumes are lower at the IRS and state tax agencies, resulting in faster refunds. Filing early also gets ahead of potential scammers filing a fraudulent tax return with a valid tax ID. 
  • Returns involving the Earned Income Tax Credit (EITC) or Additional Child Tax Credit (ACTC) need additional processing time to help the IRS stop fraudulent refunds and claims from being issued to identity thieves. By law, refunds for EITC and ACTC taxpayers cannot be issued before mid-February. Because the IRS isn’t processing returns until February 12, their refunds should start arriving in the first week of March.
  • Electronic tax refunds and payments are the safest and fastest method for financial transactions with federal and state tax agencies. Your tax preparer can usually set them up using authorized tax software. Tax agency websites include links for payments via bank account or credit card. However, these sites don’t have a refund option.
  • Advance stimulus payments, a.k.a. Economic Impact Payments, do not reduce a taxpayer’s refund or payment due for 2020. Eligible taxpayers who received less than the maximum stimulus payment amount could claim the Recovery Rebate Credit and increase her or his 2020 federal income tax refund. Anyone who received the maximum amount does not need to include any information about the payment when filing.

The IRS begins accepting and processing 2020 income tax returns on February 12, about three weeks later than usual because of last-minute tax law changes passed in December. Taxpayers who want a smooth tax filing experience should follow these five IRS tips.

IRS Expands Identity Theft Protection Program

Identity theft has existed for almost as long we we’ve had identities. Back in the Old Days, identity theft involved paper and the U.S. mail. The Internet and other online tools made identity theft faster and more wide-spread. Several year ago, when scammers hit taxpayers hard by stealing their IDs and filing fraudulent tax returns, the IRS reacted by starting an Identity Protection Program. Taxpayers who report an identity theft issue are issued an Identity Protection Personal Identification Number (IP-PIN) for filing her or his federal tax return.

With identity theft getting worse all the time, the IRS is rolling out a voluntary nation-wide IP-PIN Program for taxpayers to get identity theft protection before falling victim to an identity thief. After several years of piloting the program in different parts of the country to make sure it works as intended, the IRS is expanding the program nation-wide effective now.

How does the IP-PIN Program work? Here are six things you need to know:

  • The (IP PIN) is a six-digit code known only to the taxpayer and to the IRS. It helps prevent identity thieves from filing fraudulent tax returns using a taxpayers’ personally identifiable information.
  • Once issued by the IRS, the taxpayer’s tax account is locked, and the IP PIN serves as the key to opening that account. Electronically-filed federal income tax returns that do not contain the correct IP PIN will be rejected. A paper return must be filed. That return will go through additional scrutiny for fraud.
  • An IP PIN is valid for one specific calendar year. A new IP PIN must be obtained for each filing season.
  • This is a voluntary program. Taxpayers who want IRS assistance with identity theft protection must pass a rigorous identity verification process. Spouses and dependents are eligible for an IP PIN if she or he can also pass the identity verification process.
  • Current tax-related identity theft victims who have been receiving IP PINs via mail will experience no change.
  • There is no opt-out option. The IRS is working on it for 2022. Taxpayers who cannot provide an IP PIN or obtain a replacement can’t unlock her or his tax account and must file the return in paper form. Any refund will take several weeks to process.

The IRS IP-PIN Program is one option taxpayers can use to protect her or his identity from theft and fraudulent tax filings. For taxpayers that do want to use the program, the IRS offers more information and instructions here – https://www.irs.gov/identity-theft-fraud-scams/get-an-identity-protection-pin.

Don’t Miss Out on an EITC Refund

The Earned Income Tax Credit (EITC) was enacted back in the mid-1970s to assist low- and moderate-income workers. The EITC gives a financial boost to hard working people who can really use it. EITC can lower a working taxpayer’s tax liability, and even result in a refund that is bigger than the amount of federal taxes withheld. 

A tax credit like EITC is even better than a tax deduction. A credit is a dollar-for-dollar tax liability reduction, not a reduction of taxable income. For a worker in the 22% marginal tax bracket, a deduction means 22 cents less in tax where a credit means $1 less in taxes. Even better, the EITC is a refundable credit, meaning that the refund can be even more than the amount of income tax that was withheld or paid for the year.

Despite how large a financial boost it is, the IRS estimates that about 20% of eligible working taxpayers do not claim the EITC. Why? Because they don’t know about it.

Five important for workers to know about EITC:

  • To qualify for the EITC, the worker and everyone reported on her or his income tax return must have a valid Social Security number (SSN).
  • For 2020, workers may choose to use her or his 2019 earned income to figure the 2020 EITC if the 2019 earned income is more than the 2020 earned income. This opportunity to get a higher EITC is part of the Taxpayer Certainty and Disaster Relief Act of 2020. 
  • To qualify for the EITC, a worker must file a federal income tax return using the married filing jointly, head of household, single, or qualifying widow or widower. A worker cannot claim the EITC when using the married filing separately filing status.
  • Workers without a qualifying child are eligible for EITC by meeting the income rules, living in the U.S. for more than one-half of the year, not being claimed as a qualifying child on anyone else’s tax return, and being between the ages of 25 and 65 at the end of the tax year (usually Dec. 31).
  • Claiming the EITC could delay receiving a federal refund because of extra security checks performed by the IRS. 

The IRS wants hard working people who deserve a financial boost to know about EITC. The EITC can lower a working taxpayer’s tax liability to below zero, meaning that she or he could get a refund that is bigger than the amount of federal taxes withheld from her or his paycheck. Knowing about EITC can make a big difference in a person’s life.

Want to know more? Check out the details on the IRS website at https://www.irs.gov/credits-deductions/individuals/earned-income-tax-credit-eitc.