Although tax professionals and do-it-yourself preparation software can help walk people through their federal returns, the 2021 tax season nonetheless has folks perplexed. Are stimulus payments taxable income? Can my child attending college claim a stimulus-relief credit? Can workers take a home-office deduction now that they are commuting no farther than the kitchen table? You should want to know the answers.
So last week Eric Bronnenkant, head of tax at Betterment, an online financial management company, joined me for an online tax chat. Here are the answers to some questions that kept popping up during the discussion:
I am confused about whether stimulus payments count as income. Will we get a form to report these payments on our tax returns?
Bronnenkant: This is a common area of confusion, and there is a lot of conflicting information on the Internet. While it is true that there are no free lunches in this world, the stimulus payment does come without any strings attached and, consequently, it is considered nontaxable income.
Singletary: Technically, the stimulus payments were an advance of a credit referred to on Forms 1040 and 1040-SR as the “Recovery Rebate Credit” — on the second page, Line 30. A credit can result in a refund or decrease what you owe the IRS. At irs.gov you’ll find answers to a lot of your questions about the stimulus payments on a “Frequently Asked Questions” page devoted to the stimulus credit.
The first criterion in the worksheet for claiming the Recovery Rebate Credit relates to dependent status. Can I choose not to claim my daughter, who is in college, so she can claim the credit and get a stimulus payment?
Bronnenkant: If the parent is providing more than 50 percent of the support of a child who is a student, that child is typically a dependent and would not qualify for a stimulus payment. When you are filing your 2020 tax return, if your daughter is no longer a dependent, she may qualify for a Recovery Rebate Credit for $1,200 and $600 [for the first and second rounds of the stimulus, respectively]. The IRS has a recovery rebate worksheet on Page 58 to help determine eligibility.
Singletary: To add to what Bronnenkant said, the IRS offers this clarification: Even if you don’t claim your child but you can, he or she is not eligible to claim the stimulus-related credit. This provision could change.
What is the maximum a dependent child can earn to be claimed as a dependent?
Bronnenkant: There are two classifications of dependents — a “qualifying child” and a “qualifying relative.” There is no income test for the qualifying child, but there is a $4,300 income test for a qualifying relative. While a child’s summer job earnings typically do not impact their dependency status, parents will no longer be able to claim their child as a dependent once the child provides more than 50 percent of their own support. See IRS Publication 501, Pages 11 and 15, for further explanation.
I tried to e-file but my return was rejected because the IRS hasn’t processed my 2019 federal return, which I mailed. The IRS can’t verify my adjusted gross income. What can I do?
Bronnenkant: The IRS has provided a great workaround for this issue through the “Special Instructions to Validate Your 2020 Electronic Tax Return” notice at irs.gov. The IRS says, “If your 2019 tax return has not yet been processed, enter $0 (zero dollars) for your prior year adjusted gross income (AGI). If you used the Non-Filers: Enter Payment Info Here tool in 2020 to register for an Economic Impact Payment in 2020, enter $1 as your prior year AGI.”
How do I handle gig income? I didn’t make more than $2,000 per month last year.
Singletary: I’ve been getting this question a lot as more people turn to the gig economy to make ends meet. And yes, your gig earnings are taxable, the IRS pointed out last week. By the way, even if you don’t receive the typical forms issued when such income is earned — Form 1099-NEC, Form 1099-MISC, Form 1099-K or a W-2 form — the IRS still expects people to report the earnings.
Bronnenkant: Self-employment income (and related expenses) are reported on a Schedule C, which is part of filing a 1040. In addition, you may be eligible for a 20 percent QBI (qualified business income) deduction.
I am a teacher but I do not itemize deductions. Can I deduct pandemic-related school expenses — such as masks — on my tax return?
Singletary: Earlier this month, the IRS issued guidance reminding eligible educators that they can deduct unreimbursed expenses for protective items such as masks, disinfectant and hand sanitizer, and tape, paint or chalk to guide social distancing. It’s important to note this is an “above the line” deduction, so educators, including counselors or aides working in schools from kindergarten through Grade 12, don’t need to itemize to deduct the expenses.
Bronnenkant: The educator expense deduction is up to $250 per educator for unreimbursed expenses, including pandemic expenses. However, most teachers already spend the $250 anyway, so this would probably not provide any additional tax benefit.
How does one determine whether they can take a home office deduction?
Bronnenkant: Because of the Tax Cuts and Jobs Act passed in 2017, miscellaneous deductions that were allowed over 2 percent of adjusted gross income were repealed. Deductions that fall into this category are home-office expenses for a W-2 employee, unreimbursed employee expenses and investment advisory fees. While some people have lost deductions because of this change, the doubling of the standard deduction helped offset that loss for many individuals.
Will the $300 charitable deduction for non-itemizers continue for 2021?
Bronnenkant: 2020 was the first year that allowed a $300 deduction for non-itemizers for cash contributions to charity. This will continue for 2021, where single people can claim $300 and married couples can claim $600.
Singletary: I also put the question to the IRS. Although the charitable deduction for 2020 and 2021 was for people who don’t itemize their deductions, they differ slightly, according to IRS spokesman Eric Smith. “The 2020 deduction was indeed above the line, that is, an adjustment to income that appears above the AGI line on the return,” he said. “The 2021 deduction is below the line. So it still reduces taxable income, but it doesn’t reduce adjusted gross income. For most people, this is a distinction without a difference, but for anyone who has something linked to AGI, it does make a difference, even if only a slight one.”
Correction: An earlier version of this column incorrectly said eligible educators can claim up to a $250 “above the line” credit for school expenses, including for pandemic-related protective items. It is a $250 deduction.