Newsletter: Tax season is here, with some COVID-19-era changes

Good morning. I’m Rachel Schnalzer, the L.A. Times Business section’s audience engagement editor. Tax season is fast approaching, but before you round up your documents and slip into your yearly routine, let’s take a step back and consider how 2020 changed your financial life.

Maybe you lost work, kitted out a home office, picked up gig jobs or paid huge medical bills. Maybe your adult child moved in with you. Maybe you left the state. Those kinds of changes can have tax implications.

Although the basics of filing income tax returns are the same this year, the COVID-19 pandemic has thrown many of us into new circumstances. I spoke with four tax experts to learn more about how you can be best positioned going into tax season.

One obvious change right off the bat: filing virtually. If you’re working with a tax preparer, be ready for the possibility of connecting with them over Zoom or another video platform rather than going over your documents in person. “More and more people will be doing [virtual] meetings,” Los Angeles-based certified public accountant Susan Carlisle says.

Here are some other things to keep in mind:

What documents should you have?

Generally speaking, you should have last year’s tax return and documentation of any income you’ve made over the year.

For example, you should get a W-2 form from each employer you had. If you received income from an entity other than your employer — say, if you received unemployment benefits, performed gig work or made money from investments — those entities are likely to send you 1099 forms. If you’re self-employed, taxes are a bit different. You’ll need to put together a Schedule C and a Schedule SE form.

Gather proof of any deductions you’d like to itemize.

Those who have an Individual Taxpayer Identification Number instead of a Social Security number need to make sure it’s renewed before they file their tax return, says Alejandro Valenzuela Jr., the tax and financial services director at Prepare and Prosper, a tax prep and financial services organization in St. Paul, Minn.

If you’re meeting with a tax preparer, get organized before your appointment. “Accountants don’t want you to bring in little pieces of paper — that takes way too much time, Carlisle says. “You’re going to be charged more than you need to be if you’re wasting your tax preparer’s time.”

Carlisle recommends organizing your paperwork into categories. “If you’re an Uber driver, for example, or any other small-business person, you want a list of categories that may be considered deductible.” For a ride-hail driver, these categories may include your phone bills, gasoline expenses and car insurance, Carlisle says.

Standard vs. itemized deductions

Income taxes don’t take a slice of all the money you make; rather, they take a percentage of what is designated as taxable income. Your taxable income can be decreased by claiming deductions.

You can claim deductions either by listing out your qualifying expenses — known as itemized deductions — or by claiming the “standard deduction,” an amount that the government allows anyone to take regardless of their expenses.

To decide whether it’s worth itemizing, add up your deductible expenses and see whether the total exceeds the standard deduction. Take whichever deduction is bigger.

Did you pay medical bills?

Medical expenses above a certain level are deductible, and some people could be facing large medical bills if they landed in the hospital with COVID-19.

But note: The amount you can deduct for medical expenses is smaller than the amount you paid to cover medical expenses. To figure out how much you can deduct, add up what you paid for medical expenses — including health insurance premiums — and then subtract 7.5% of your adjusted gross income from that amount. If the result is in the negative numbers, you won’t be deducting medical expenses, Carlisle explains.

If the result is a positive number (that is, if the medical expenses you paid exceed 7.5% of your gross adjusted income) then you can put it on your list of deductions — along with all your other deductions — and see whether all your deductions combined are bigger than the standard deduction.

Did you lose work?

First of all, if you received unemployment benefits and didn’t have taxes withheld, you’ll owe taxes on this income.

In addition, if you previously earned too much to get a stimulus check but have since lost your job, Carlisle suggests asking your tax preparer whether you’re now eligible to receive stimulus money through the recovery rebate credit. This calculation will be part of your 2020 tax return.

“If you have not gotten your stimulus check yet, it is super important to file taxes” this year, says Janne Huang, the outreach campaign strategies manager with the National Get It Back Campaign.

You might qualify for the Earned Income Tax Credit, or EITC, a refundable tax credit designed to boost incomes for workers earning low to moderate wages, said Stacy Opitz, who until last week was the external relations director at Prepare and Prosper.

If you earned less in 2020 than you did in 2019, consider the “lookback rule” when claiming the EITC or Additional Child Tax Credit to get a larger refund, Valenzuela says. This year, filers can qualify for those credits based on either their 2019 income or their 2020 income and should list whichever yields a bigger credit.

Valenzuela advises filers to bring their 2019 tax return when meeting with a tax preparer, who can determine whether using the lookback rule is a good option.

Did your income jump?

Some people who had more income in 2020 than in 2019 are wondering whether it would make sense to delay filing their tax returns in the hopes of getting a better shot at receiving additional federal stimulus money.

Is this a good strategy? It could be, but there are some counterpoints to keep in mind. We still don’t know what the income ceiling will be for the upcoming round of stimulus checks — lawmakers are still debating it, as Jordain Carney reports in the Hill. It’s also unclear how long you’d have to wait, since we don’t know when the upcoming round of stimulus payments will be issued.

Be aware that if you expect a tax refund, holding off on filing your tax return means delaying your refund. And if you plan on filing after April 15, you will still have to estimate how much you’ll owe and pay that by April 15 or else face extra fees. An extension would give you until Oct. 15 to finish the paperwork. Here are directions on filing for a federal extension, while California will give you an automatic extension on your state income tax return.

Are you self-employed?

“The best way to reduce your taxes and maximize your income is by really carefully tracking every single dollar you spend on your business,” Huang advises. “Anyone who’s driving for gig work, the mileage deduction is the most important one to pay attention to.”

One way to help keep expenses organized: Use different bank accounts and credit cards for business purposes than for personal purposes, Huang suggests.

Gig workers and other self-employed people should pay taxes throughout the year, doing quarterly estimated payments. “Otherwise,” Huang says, “you will be hit with a big bill at tax time.”

Generally, self-employed people who expect to owe $1,000 or more in federal income tax for the year are required to make these quarterly payments.

The Get It Back campaign created a tax calculator to help gig workers figure out how much to pay. “Some people like to do a monthly payment, thinking of it as an automatic bill,” Huang explains. Take a look at the campaign’s “roadmap to rideshare taxes” site to learn more.

Another way to save come tax time? Carlisle advises gig workers to speak with their tax preparer about setting up a retirement plan.

Charitable deductions

Did you make any cash contributions to qualifying charities last year? If so, you’ll be able to take a federal tax deduction of up to $300 even if you don’t itemize, Carlisle says.

If you’re interested in making charitable deductions, take a look at this breakdown from the Internal Revenue Service.

Are you living and working out of state during the pandemic?

Say you left California to live at a relative’s house to save money during the pandemic. Don’t assume you’ve escaped paying California taxes, Carlisle says.

To file taxes as a resident of another state, you’ll need to prove that you no longer have a residence in California, that you’re not registered to vote in California, that your driver’s license is in another state, and so on. “They want to make damn sure that you’ve left for good before they’ll let you go. Because they will hunt you down,” Carlisle says.

Free resources

If you can’t afford a tax preparer, you may qualify for free help.

The IRS’ Volunteer Income Tax Assistance program, known as VITA, “is a great option and a great program,” says Opitz. It focuses on people making $57,000 or less per year, people with disabilities and people who speak limited English.

VITA’s sister program, Tax Counseling for the Elderly, is primarily for people ages 60 and older and has a focus on retirement- and pension-related tax issues.

Tax Time Allies is a group of organizations, several of which offer free tax preparation.

Code for America’s Get Your Refund service also offers free tax assistance, though its 2021 service has not yet begun.

If you have a simple tax return, you may choose to prepare it yourself. The IRS and the Get it Back campaign offer online resources.

And if you choose to go with a paid tax preparer, Opitz advises, “make sure [you] understand what the fee structure is and what their experience and credentials are.”

A reader asked: Normally I cannot deduct my home office because my employer provides an office, but we were required to work remotely during the pandemic. Can I deduct home office expenses for those months of 2020?

It’s possible. For a full breakdown of how your home office can be used as a write-off in California, take a look at this previous edition of the newsletter.

A reader asked: My children are adults, but they moved back home during the pandemic and do not pay me anything for rent or food. Can I deduct adults in that situation as dependents?

Maybe. Generally speaking, “a child who earned gross income of less than $4,300 in 2020 may be claimed as your dependent,” Carlisle said in an email. “There’s no income limit if the child is under age 24 all year and went to school full time for at least 5 months during the calendar year.”

There are additional factors. For answers tailored to your situation, do this IRS questionnaire.

Other stories you may find helpful

◆ Ralphs and Food 4 Less parent Kroger is shutting down two of its grocery stores in Long Beach in response to a city rule requiring “hero pay” for grocery workers. Times staffers explain how this issue could affect you.

◆ Do you rent a storage unit? Columnist David Lazarus looked into which state regulator is in charge of protecting you, and he’s not happy with what he learned.

◆ People who refuse to wear masks on planes, buses or trains are now subject to federal fines of up to $1,500, Hugo Martín reports. Same goes for people in airports or train or bus stations.

◆ COVID-19 slammed small businesses, but a surprising number are thriving. Eryn Brown reports on those that are making it through the pandemic.

◆ A reader wanted advice on finding an accountant and financial planner after a divorce. Certified financial planner Liz Weston shared her insights.

◆ President Biden has swept Trump’s fiercely anti-union appointees out of a key federal labor agency, columnist Michael Hiltzik writes.

◆ Facial recognition may help find last month’s Capitol rioters — but it could harm many others. Johana Bhuiyan spoke to experts who explained the danger of normalizing surveillance tactics that have been used disproportionately on Black and brown communities.

◆ The Trump administration left a big traffic-safety mess for Biden, Russ Mitchell reports. He describes how Tesla’s self-driving claims are a big part of the problem

One more thing

Millions of renters unable to make their payments during the pandemic are at risk of emptying their savings, ruining their credit and losing their homes, my colleague Andrew Khouri reports.

Eviction moratoriums offer help at the moment, but it could take low-income renters years to pay back all their rent debt. “Even if they say we can pay [missed rent] back in two or three years — that’s money we don’t have,” Kelly Wise, a resident of L.A.’s Westlake neighborhood, told Khouri. Read the full story.

Have a question about work, business or finances during the COVID-19 pandemic, or tips for coping that you’d like to share? Send us an email at californiainc@latimes.com, and we may include it in a future newsletter.