What are the tax implications of these common COVID-19 related situations?
COVID-19 has certainly changed our lives in many ways: many people are either working remotely or have been furloughed or newly unemployed. Here is the tax treatment information about these two common situations:
1. Working from home
Many offices are closed and, as a result, many office workers are currently working from home or “telecommuting.” If you’re an employee who “telecommutes” — works from home and communicates with your employer mainly by telephone, videoconferencing, email, etc. — you might be thinking, “Well, at least I get to deduct my home office expenses. Right?” The answer is not quite as clear cut. You should know about the strict rules that govern whether or not you can deduct your home office expenses.
Unfortunately, employee home office expenses are not currently deductible, even if your employer requires you to work from home. These unreimbursed employee business expense deductions are part of the general miscellaneous itemized deductions which were disallowed from 2018 through 2025 under the Tax Cuts and Jobs Act.
There is an opportunity for employers to reimburse these costs under an “accountable” reimbursement plan. With a successfully executed accountable plan, an employer can reimburse and deduct the expense without causing additional income to the employee.
However, if you’re self-employed and work out of an office in your home, you may be eligible to claim home office deductions for your related expenses if you satisfy the strict rules. To qualify for the deduction, the office must the regular and exclusive use of the office space…..so working from your dining room table is not going to qualify.
2. Collecting unemployment
Millions of Americans have lost their jobs due to COVID-19 and are collecting unemployment benefits. However, many people don’t know that these benefits are actually taxable and must be reported on their federal income tax returns in the tax year they are received. Taxable benefits include the special $600 unemployment compensation authorized under the Coronavirus Aid, Relief and Economic Security (CARES) Act.
In order to avoid a big surprise tax bill when filing a 2020 income tax return next year, unemployment recipients can elect to have taxes withheld from their benefits as they receive them.
Under federal law, recipients can opt to have 10% withheld from their benefits to cover part or all of their tax liability. To do this, complete Form W4-V, Voluntary Withholding Request, and give it to the agency paying benefits. (NOTE: Do not send W4-V to the IRS.)
Having these withholdings will not guarantee you do not owe anything, especially if you are unemployed for only part of the year. For example, if you’re in the 22% tax bracket, a 10% withholding rate may not be enough.
Be sure to check with your state’s unemployment department for more information or, as always, contact your friendly advisor here at Wegner CPAs.
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