Tax return professional interviewing a client.
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Good tax professionals ask good questions. If you are using a paid preparer for the first time or are using a new preparer this filing season be sure that they have been keeping up with current events. The coronavirus pandemic has resulted in a host of new tax legislation and potential tax issues and if the preparer you choose works exclusively during tax season as opposed to year round, they may not be aware of how the new laws and the issues could affect you. At a minimum your return preparer should be asking the following six questions:
- Did you get your stimulus payments?
- Are you eligible for the Earned Income Credit?
- Were you working from home?
- Did you receive a Form 1099-G?
- Did you take Covid-19 related distributions from a retirement account?
- Were you unable to work because you had Covid-19 or because you were caring for someone with Covid-19?
Did you get your stimulus payments a.k.a. stimulus checks?
The amount of your stimulus payments must be reconciled on your 2020 Form 1040 to determine if you qualify for the Recovery Rebate Credit. If you got the right amount of stimulus payments or too much, it does not affect your refund or balance due. If, however, you qualified for stimulus payments but didn’t receive them or didn’t get the full amount to which you are entitled to based on your 2020 income, any amounts due to you will be reconciled on your return and either refunded to you or applied to your balance due.
Are you eligible for the Earned Income Credit (EIC)?
If you are eligible for the EIC your practitioner should be checking to see whether it’s more advantageous for you to use your 2020 earned income or your 2019 earned income for the purposes of this credit as well as for the Child Tax Credit (CTC) if you have a qualifying child. The Taxpayer Certainty and Disaster Tax Relief Act of 2020 extends an earlier “lookback” provision that states that if your income used to determine the EIC was higher in 2019 than it was in 2020 you can use the higher income if that will result in additional EIC or CTC on your 2020 income tax return.
Were you working from home (and if so, for how long)?
The pandemic resulted in many workers who normally commuted to an office in another state working from a home office in their state of residence. Your preparer should be verifying both your “normal” work location and your work from home location and should understand the possible nexus issues and filing requirements for each state. Your preparer also needs to understand when home office expenses are deductible (if you’re self-employed or an independent contractor) and when they are not (you’re a regular employee working from home because of the pandemic). If you are an employee and receive a W2 and your paid preparer is saying you can deduct your home office expenses because of the pandemic (or “convenience of the employer”) find another preparer.
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Did you receive a Form 1099-G for unemployment compensation?
And this year’s follow up questions: “Did you apply for it?” and, “Was it the correct amount?” Scammers took advantage of the spike in pandemic-related unemployment to use stolen information to file fraudulent unemployment benefits claims. Your tax professional may or may not be able to help you with correcting the problem, but they should be aware of the problem and, at a minimum, urge you to get a corrected Form 1099-G from your state unemployment office. In addition to the fraudulent claims, some tax practitioners are reporting high numbers of Forms 1099-G that are simply incorrect. Again, the solution is to contact your state unemployment office and request a corrected form. Unfortunately, given the volume of claims (both real and fraudulent) this may be easier said than done and it may result in delays in filing.
Did you take any Covid-19 related distributions from your retirement accounts this year?
The practitioner should be aware of the basic requirements that qualify a distribution as Covid-19 related and should ask enough follow-up questions to determine if your distribution qualifies for the beneficial tax treatment. Distributions that qualify for this beneficial tax treatment are not subject to the 10% early withdrawal penalty. Additionally, the income is included ratably over three years unless the taxpayer elects to have it all included in the first year. The practitioner should ask enough questions to determine what is the best option for you. If 2020 was a low income year, making the “include it all now” election might be the best choice. If not, they should know the rules for spreading the distribution over the three years and they should be able to explain how you can pay the distribution back (and get a refund of the taxes you paid) if your circumstances change and you want to put some or all of the distributed money back into your retirement account(s).
Were you unable to work because you required care due to coronavirus or because you were caring for an individual with coronavirus?
Under the Families First Coronavirus Response Act (FFRCA) self-employed individuals may be eligible for sick and family leave credits if they were unable to work between April 1, 2020 and December 31, 2020 because they or a family member had the coronavirus. Your return preparer, after determining if you qualify for the credit, will prepare Form 7202 and file it with your Form 1040. Employees of employers who don’t offer paid sick leave were also entitled to up to 80 hours of paid sick leave. Employers who did not have paid sick leave programs in place for their employees could qualify for a tax credit for sick leave wages paid to employees who were unable to work due to coronavirus. Employees who should have qualified for paid sick leave from their employers but did not receive it cannot fix this on their individual tax returns but must consult with their employer who may not have been aware of the applicable tax credit.
Finally, it’s not a question but an experienced practitioner will also notice if you were subject to FICA tax deferral under former president Donald Trump’s August 8, 2020 Executive Order. While it doesn’t affect your income tax return(s) the deferred amounts will have to be paid back between January 1, 2021 and April 30,2021. Your tax professional should let you know if you were subject to the deferral in 2020 and remind you to expect the resulting reduction in take home pay as the deferred taxes are paid back by withholding from your current paychecks.
Preparing an accurate tax return always requires a thorough client interview, but that is even more true this filing season. In addition to all of the usual questions tax professionals should be asking questions specifically related to Covid-19 relief provisions. If your return preparer isn’t asking or will not answer your questions about relief to which you may be entitled it may be time to find a different preparer.