The pandemic is (hopefully) turning endemic, and things are (hopefully) going back to normal now—just not completely. Everything still looks kinda different because of COVID, even when you’re not peering over the top of a KN95. The way you work probably looks different because of COVID; your miniature dachshund now counts as your most disruptive coworker. The way you look during work is probably different too—remember the shadowy, sallow, pre-ring light days? (And the pants-with-buttons days?) Your house probably looks different because of COVID if you spent a year or two disrupting the supply chain with lockdown-inspired redecorating purchases. Your body might look different because of COVID, too, whether you swore off booze and became a YouTube yogi or went all-in on carbs after breadmaking took hold as a permanent lifestyle.
After all of that, it should come as no surprise that your tax return for COVID times might look different, too. The American Rescue Plan added some temporary relief people can claim in the form of 2021 tax refunds, yet those who collected unemployment and stimulus checks might be surprised to find they owe more taxes than usual. Here are a handful of pandemic-specific twists and turns to keep in mind as you navigate your way through a particularly tricky 2021 tax return. One thing that won’t look different: There’s no automatic months-long extension on the due date like we saw for the past two years, though you do get a three-day grace period. Taxes are due April 18, since the IRS is closed on April 15 for Emancipation Day in Washington, D.C., which means it’s time to tear off a chunk of sourdough and get down to business.
You may have to pay taxes on unemployment. (Sorry.)
Although this was waived for 2020 thanks to the American Rescue Plan—no taxes needed to be paid that year on unemployment benefits of up to $10,200—that temporary relief period has ended. So, this time around you do need to claim any unemployment benefits and pay taxes on them, just as you would have in pre-pandemic times—assuming you didn’t already have taxes withheld.
Now’s your chance to collect a missing stimulus payment.
The third and final $1,400 stimulus checks were sent out during the last week of January last year, but if you were among the groups of people who never received one, here’s happy tax-time news: “Those who were eligible for the third stimulus check in 2021 but never received it can get their payment when they file their 2021 taxes,” says Armine Alajian, CPA and founder of the Alajian Group in Los Angeles. Anyone who received less than they should can claim the Recovery Rebate Credit, and get that money added to their refund or applied toward taxes owed.
You may be able to get money back for COVID-related sick leave.
If you’re self-employed and had to take unpaid time off because you had COVID, or had to take care of someone who did, or couldn’t work because you had to quarantine after an exposure, you might be able to claim that on your 2021 taxes. “Self-employed taxpayers can claim sick and family leave credits that are similar to credits allowed for other businesses if they were unable to perform services as a self-employed person due to certain COVID-19 related circumstances during the first nine months of the year,” explains Monique McGrant, vice president of McGrant Tax & Bookkeeping in Charlotte, North Carolina. You can figure out how much you can claim using Form 7202.
If you withdrew money from a retirement account in 2020, you may owe taxes on that now.
Usually, you pay a 10% early withdrawal penalty if you take money out of an IRA or 401,000 before you turn 59.5 years old. But if you did so as a result of COVID during 2020, you could avoid that penalty thanks to a provision in the CARES Act. The rule allowed taxpayers to divide up that income over three years in order to space out tax payments. If this was the case for you, remember that this income will be part of your 2021 return.
Your refund could be less than last year’s if you have student loans.
Interestingly, COVID relief for student loans may actually result in a small increase in taxes for some. “The student loan payment pause not only pushed back payments for borrowers, but it paused interest,” Alajian says. “This means that most of those who typically write off their student loan interest can’t do so this year, resulting in a refund that’s potentially a couple hundred dollars less.” However, if you have private student loans or federal student loans that didn’t qualify for the pause, you can still write off that interest.
Your pandemic gig work will probably shake up your tax return.
Odd jobs that don’t require serious commitment have become a lifeline during these weird times. “For the past couple years, a large influx of people began making deliveries for InstaCart or driving for ride-sharing companies to make extra cash on the side, a.k.a. joining the gig economy,” Alajian says. “What’s easy to forget with these kinds of jobs is that you have to report all of your earnings on your tax return, even if you didn’t make a lot of money.” If you ended up making more money than you did in the past while doing gig work, you might owe money instead of receiving a refund. You’ll also need to make sure you received 1099s from those companies. Note: If you earned less than $600 on a job, the payer doesn’t need to send you a 1099, but you’re still obligated to report that income—or you’ll risk getting fined.
If you’re suddenly self-employed, you’ll have more to write off.
Maybe you used to work full-time and get a W-2 before COVID, but now you do freelance landscaping and sell bespoke dog sweaters thanks to pandemic downsizing. That means you’re eligible to claim business expenses as you fill out your tax return for COVID times. These include things like vehicle repairs, parking, tolls, and business-related mileage; necessary tools and equipment; and a $5-per-square-foot home-office deduction (even if you rent vs. own). The key is to keep detailed logs and records that prove each expense was business-related, in case you ever get audited. The catch: Many of these deductions apply only to self-employed people who work from home. “If you have become an independent contractor, then certain work-from-home deductions are now fair game,” says Judith Lu, CEO and founder of Blue Zone Wealth Advisors in Los Angeles. “You can deduct expenses such as internet, office space, computers, printers, phone lines, etc. This does not apply to people who continue to be employees of a company and are merely working from home. Although many of us are working from home, the tax break is reserved specifically for those who are self-employed.”
More unusual gig work requires special tax-return attention.
If you’ve found yourself in another sort of new work niche due to the pandemic, you don’t want to miss out on a big refund because you’re not taking full advantage of deductions related to an off-the-beaten-track job. “A plug-and-play software like TurboTax won’t necessarily prompt you with the right questions if your job is out of the ordinary,” says Lindsey Swanson, CFP and founder of Stripper Financial Planning, which caters to the exact clientele its name implies. “Even an established CPA firm won’t intuitively know the nuances of your industry. You’ll either want to do significant research to understand the tax implications of your unique situation or seek out a professional that works with clients like you. With my sex worker clientele, I specifically refer them to tax professionals that understand the inner workings of their industry.”
If you’re a parent, there’s lots of new stuff to consider.
Your refund might be smaller or larger than usual if you benefited from the enhanced Child Tax Credit (CTC). For 2021, it was increased from $2,000 to between $3,000 and $3,600 per child, depending on the child’s age. Some parents have already received an advance on this credit in the form of monthly payments. “Parents can claim the remainder of this credit when they file their return, while those who opted out of the installment plan can claim it all at once,” Alajian explains. That said, the CTC was based on 2020 income information. If your income was higher in 2021, you may have to pay back some of the advance credit you received. There are also changes to the Child and Dependent Care Credit. For 2021 only, you can get a tax credit of up to $8,000 for daycare expenses. Plus, if the amount you’re eligible for exceeds what you owe in taxes, you can still receive the remainder as a tax refund. “This is one item you certainly do not want to miss,” says Gail Rosen, a CPA in Martinsville, New Jersey. “You can include daycare expenses, summer day camp, and babysitters you pay via W-2.”
More tips on your tax return for COVID times:
