Although the federal tax deadline was recently extended from April 15 to May 17, 2021, taxpayers are encouraged to file their taxes now to get their refund ASAP. Most people receive a tax refund each year and last year the average refund amount was close to $3,000.
As taxpayers continue to file their taxes, we are seeing a wide range of tax questions which range from those asked routinely “can I claim my boyfriend/girlfriend as a dependent?” to those specific to coronavirus relief and disaster relief. To help make the filing process as easy as possible, TurboTax has answered the most commonly asked tax questions for this tax season.
Who Can I Claim as a Dependent?
Your significant other is probably many things to you—but is he or she also worth a deduction or credit? The question of who you can claim as a dependent has confused taxpayers for years.
The short answer: You can claim a “qualifying child” or “qualifying relative” if they meet specific requirements related to residence, relationship to you, age, financial support provided and income. So, yes, you may be able to claim your significant other or friend as a qualifying relative in some cases. You no longer get a dependent exemption for your dependent, but being able to claim them can also make you eligible for other tax benefits like the Other Dependent Credit (ODC) and the Earned Income Tax Credit (EITC).
You may be able to take the Other Dependent Credit worth $500 if:
- You are providing support for a non-child dependent like another family member, boyfriend, girlfriend, domestic partner, or friend. You can also claim this credit for your kids 17 and over since you cannot claim the Child Tax Credit once they turn 17 for 2020.
- They are a member of your household the entire year if they are a non-relative (relatives don’t need to live with you).
- The relationship between you and the dependent girlfriend/boyfriend does not violate the law, for example, you cannot still be married to someone else. (Also, check regarding your individual state law, as some states do not allow you to claim a boyfriend or girlfriend as a dependent even if your relationship doesn’t violate the law).
- You meet all the other criteria for “qualifying relatives” (gross income and support).
What is the Earned Income Tax Credit and How Do I Claim it?
The Earned Income Tax Credit is a tax credit for low to middle income wage earners that has lifted millions of people out of poverty, however many people still miss it. Why do so many people miss it? Many think they don’t make enough to file their taxes so they don’t claim it or their income changed but they are not aware that they can qualify. You have to file to get this valuable tax credit, which may help a family with three children who qualify receive a credit worth up to $6,660 for 2020. Families without children may qualify for a credit up to $538.
For tax year 2021 (the taxes you file in 2022), the federal Earned Income Tax Credit has been expanded for workers without kids and nearly triples the maximum allowable credit under the American Rescue Plan. This bill has also changed eligibility and will be extended for a wider range of filers to include taxpayers over age 65 and between ages 19-25.
Does Health Care Reform Still Impact My Taxes?
With tax reform enacted at the end of 2017 there have been questions around the requirements to have health care coverage. Under tax reform, effective for tax year 2019 the tax penalty for not having health insurance is eliminated. Taxpayers will no longer be required to pay a tax penalty for not having health insurance. Individuals with income over the federal poverty level are still required to have 2018 health care coverage or they may be subject to a tax penalty when they file their 2018 taxes. All of the exemptions (based on income, religious beliefs, and citizenship) are still in place.
If you receive health insurance coverage in a qualified health insurance plan purchased from Healthcare.gov or through a State Marketplace, you may have received an Advanced Premium Tax Credit or subsidy to help you pay for your 2020 health insurance, which was based on your projection of your 2020 household income. Typically under the Affordable Care Act, if your actual income for the tax year is more than what was projected when you applied for health insurance in the Health Insurance Marketplace, then you are required to pay back a portion of the excess Advance Premium Tax Credit or subsidy that you received when you file your taxes. However, due to the challenges Americans faced with fluctuating income in 2020, the American Rescue Plan temporarily waives the requirement for taxpayers to pay back excess Advance Premium Tax Credits and file Form 8962 on their 2020 taxes.
Are Unemployment Benefits Taxable?
Typically, unemployment income is taxable and should be included in your income for the year. Some states may also count unemployment benefits as taxable income. When it’s time to file your taxes, you will receive Form 1099-G which will show the amount of unemployment income you received. Form 1099-G will also show any federal taxes you had withheld from your unemployment pay.
However, under the American Rescue Plan, signed into law on March 11, 2021, the first $10,200 ($20,400 married filing jointly) of unemployment income is tax-free on your 2020 taxes for households with income less than $150,000, helping millions of unemployed save on their taxes.
Can I Deduct the Cost of Searching for a Job? Are Moving Expenses for My New Job Tax Deductible?
Unfortunately, for tax years 2018 through 2025, the tax deduction for job search expenses was eliminated on your federal taxes under tax reform, along with all miscellaneous itemized deductions. The tax deduction for moving expenses for non-military taxpayers was also eliminated. In order to deduct certain moving expenses, you must be an active member of the military and moving due to a permanent change of duty station.
What are the Tax Implications of Withdrawing Money Early from a Retirement Account to Pay Bills or Debt?
Typically, withdrawing money early from a retirement account comes with a 10 percent tax penalty if you withdraw your money before age 59-1/2 in addition to the regular income tax on the amount withdrawn. There can be other consequences, too. The retirement money may also bump you into a higher tax bracket, which can result in the taxation of other income, such as social security, that you may have not been taxed on otherwise.
If you were impacted by Coronavirus, however, and need to take money out of your retirement plan ASAP, keep in mind that the 10 percent early withdrawal penalty may be waived on up to $100K of retirement funds withdrawn. You are a qualified individual if:
- You, your spouse, or dependent are diagnosed with Coronavirus
- You experience adverse financial consequences as a result of being quarantined, furloughed, or laid off
- You had hours reduced due to Coronavirus
- You are unable to work due to your child care closing or reducing hours
In addition, there are also tax breaks for victims of natural disasters who have withdrawn from retirement accounts. See below.
I Was Impacted by a Natural Disaster in 2020 or 2021. What Tax Breaks are Available to Me?
Prior to tax reform, you were able to deduct most losses for uninsured casualty, disaster and theft losses. Under tax reform provisions, deductions for casualty and theft losses have changed for tax years 2018 through 2025. If you suffered a casualty or theft loss as a result of an unusual event like a flood, fire or some other unforeseen event, you can deduct the loss if the casualty is within a federally declared disaster area or the theft occurred as a result of a federally declared disaster.
The IRS may provide additional special tax provisions to help recover financially from the impact of a disaster when the federal government declares a certain location to be a major disaster area. Depending on the circumstances, relief may be additional time to file returns and pay taxes.
The Taxpayer Certainty and Disaster Tax Relief Act of 2019 was also signed into law on December 20, 2019, and provides special tax relief for individuals and businesses in Presidentially-declared disaster areas occurring between January 1, 2018, and January 20, 2020. Some of the relief includes special rules for qualified disaster-related personal casualty losses, eased access to retirement funds, and special rules for determining Earned Income Tax Credit and Child Tax Credit.
Recently, in response to coronavirus, the Treasury, IRS and federal government have announced several forms of relief to help those impacted by coronavirus.
In response to the devastating winter storms that began in February 2021 throughout Texas, Oklahoma, and Louisiana the IRS extended the deadline for winter storm victims to file various individual and business tax returns and make certain tax payments until June 15, 2021.
The IRS also announced an extension of the 2020 tax return deadline for individuals and businesses in Tennessee affected by spring storms and tornadoes until August 2, 2021. The IRS also extended the deadlines for disaster victims in Kentucky and Alabama. Individuals and businesses in parts of Kentucky have until June 30 to file and pay their taxes. Individuals and businesses in parts of Alabama have until August 2 to file and pay.
What are Qualified Education Expenses?
College tuition skyrockets every year, but the U.S. government provides incentives with education credits and deductions. For example, the American Opportunity Tax Credit benefits full-time and part-time college students in their first four years of college with a maximum $2,500 credit per student, provided you meet modified adjusted gross income requirements. You may also be eligible for the Lifetime Learning Credit up to $2,000, even if you take one college course.
I Started My Own Business. Can I Deduct My Home Office Expenses?
Many entrepreneurs are reluctant to write off the business use of their home for fear of being audited. But home office expenses are legitimate tax deductions you shouldn’t miss out on. Keep in mind the space you claim as a home office should be used exclusively and regularly for that purpose. Don’t forget to include the square footage of your home office used for product storage or inventory.
What If I Still Have Questions?
Don’t worry about knowing these tax laws. TurboTax has you covered and will ask simple questions and give you the tax deductions and credits you’re eligible for based on your entries. If you still have questions, you can connect live via one-way video to a TurboTax Live tax expert with an average 12 years experience to get your tax questions answered. TurboTax Live tax experts are available in English and Spanish, year round and can also review, sign, and file your tax return.