A year ago this month, taxpayers got an extension on filing their income taxes as they processed the enormity of making ends meet in the economic crash of a deadly pandemic. Entering this year, the Internal Revenue Service pushed back to mid-February the date it would begin processing tax filings itself, though advising taxpayers to file as early as possible, as there is no filing extension this year (not as of this writing, at least).
What else has changed for Connecticut earners, from whom the IRS collected $46 billion in income taxes for the most recent year on record, or $18,650 each on average? A new Beltway regime, for starters, with the inauguration of President Biden and Democrats winning majority control of both wings in Congress. While the tax implications will be played out for the next four years, 2021 becomes a particularly important year for planning purposes, as elements of the Tax Cuts and Jobs Act of 2017 come under review.
Every year, you want to check any changes to limits on tax credits, deductions and other legal means to limit your tax exposure — the IRS lists them online at irs.gov. Here, we go around the horn with some of the tips Connecticut tax advisers are flagging as to other tax priorities that should be top of mind this year.
What’s the outlook for the IRS cap on SALT deductions?
In states like Connecticut and New York with high home values, the Tax Cuts & Jobs Act included one major unwelcome element: a $10,000 cap on state and local tax deductions, including amounts owed to towns for property taxes. That eliminated deductions that homeowners might have been able to book on houses worth more than $650,000, with roughly four in 10 filings from Connecticut in 2015 claiming SALT deductions, at an average level of $19,665.
During last year’s campaign, Biden signaled his intent to eliminate the $10,000 cap, with SALT accounting expert Tony Switajewski in the West Hartford office of CliftonLarsonAllen saying he does not expect any retroactive element if the cap is eliminated this year, adding that is no sure thing in itself. “They are going to have to consider it in the totality of their entire tax package,” Switajewski says. “There’s nothing definitive right now on whether it’s going to be repealed or not.”
Any deductions available for those forced to work from home?
No such luck. The TCJA eliminated entirely other itemized deductions on income taxes in favor of a larger standard deduction, including those for home business expenses incurred by people who commute to work normally. Deductions stayed in place for self-employed workers — using a simplified calculation, one can take a deduction of $5 per square foot on office space for up to $1,500. But last year’s stimulus packages contained no similar perk to deduct the cost of broadband bills, printer cartridges and other costs that people may have picked up while working at home. If you are self-employed and can claim the deduction, accountants with New Haven-based Beers, Hamerman, Cohen & Burger advise going so far as to keep photos of any spaces in the home used for work purposes as ready evidence in any future audit.
What are the tax implications if I claim unemployment benefits?
Andrew Lattimer, another CliftonLarsonAllen partner in West Hartford, notes it was only natural for furloughed workers to check off the “do not withhold” tax option on unemployment compensation they received last year, given the instinct to amass cash for looming bills and uncertainties of what was to come. For those who did so in 2020 without subsequent payments on estimated amounts due, the tax bill on those payments is now coming due — and for some, it will come out to thousands of dollars. For anyone still struggling, Lattimer advises to check the federal and state websites at irs.gov and portal.ct.gov/drs for payment installment options. For anyone receiving benefits this year, he advises to sign up for withholding if immediate circumstances allow it.
Any new protections when it comes to the risk of identity theft?
The Newtown accountancy Clavette & Co. is among the Connecticut firms calling attention to one big one — the expansion in January of the IRS Identity Protection PIN Opt-In Program to all taxpayers, with IP PINs previously available only to victims of identity theft. IP PINs replace Social Security numbers on IRS forms, eliminating one major piece of the puzzle for thieves in attempting to open accounts using personal information picked off via various schemes — or siphoning off refunds themselves. Taxpayers get a new IP PIN generated every year — information is at irs.gov/identity-theft-fraud-scams.
Standard deductions increased
For tax year 2020, the standard deduction for each filing status went up slightly to adjust for inflation.
Single: $12,200 in 2019, $12,400 in 2020
Married filing jointly: $24,400 in 2019, $24,800 in 2020
Married filing separately: $12,200 in 2019, $12,400 in 2020
Head of household: $18,350 in 2019, $18,650 in 2020