Market Overview
Taxpayers want to know: ‘Can I deduct the cost of facemasks?’
The non-snarky answer to the headline question is: No. Unless you’re a medical professional or other frontline worker, you’re out of luck. For tax purposes, masks are the equivalent of vitamin supplements. Which is pretty obnoxious considering that not one single state has a vitamin mandate in place.
Looking back
If you want to know more about what you can and can’t do as you file your 2020 return, the best place to start is Publication 17, the Internal Revenue Service’s annual tax guide. The current edition has plenty of pandemic-specific advice:
- Your economic impact payments are not taxable, but unemployment benefits – whether state- or federally-funded, are.
- If you didn’t get your stimulus money, you can claim a Recovery Rebate Credit to catch up.
- Even if you don’t itemize, you can still claim $300 in donations because, in 2020, pretty much everybody gave to some charity or another.
- The definition of educational expenses for which 529 funds can be used has been expanded to cover homeschooling costs.
- If you’re self-employed or if you have household staff, you might be able to defer payment of 50% of the Social Security tax imposed after March 27, 2020.
- The Families First Coronavirus Relief Act helps self-employed individuals affected by coronavirus by providing paid sick leave and paid family leave credits equivalent to those that employers are required to provide.
- Although the new rules are still being hashed out, there will be some tax-favored withdrawals, income inclusion and repayments for IRA distribution recipients who were diagnosed with or suffered economic losses as a result of the coronavirus. If you needed to take a hardship withdrawal out of your retirement plan, you can probably borrow against it or take out up to $100,000 without a penalty but you’ll have to fill out Form 8915-E.
Looking ahead
All that is probably going to be erased by next year, when you file your 2021 taxes. But there are a couple changes to IRA treatment that are unrelated to the pandemic:
- The age for beginning required minimum distributions is now 72, not 70½.
- Distributions must be made by the end of the 10th year after death, although there are some exceptions.
Further, the new standard deduction is $12,400 for singles, $24,800 for married couples and $18,650 for heads of household.
While the Biden administration has not presented any new tax plan to Congress – indeed, the Senate wouldn’t even approve the new president’s pick for budget director – promises were made during the campaign, so we know enough to sketch the outline. To summarize Investopedia’s excellent guide to the White House’s direction on income taxes:
- Reverse the top federal income tax rate to the 39.6% it stood at prior to the 2017 reduction to 37%.
- Impose a surtax on individuals earning more than $400,000 per year, and tax long-term capital gains as ordinary income for those making more than $1 million.
- Raise the corporate tax rate from 21% to 28%; it was 38.9% pre-Trump.
- Increase the child tax credit from $3,000 to $8,000 per year.
- Offer tax relief related to student debt and first-time homebuying.
- Halve the estate tax exemption.
Parting thoughts
Depending on your situation, the Biden tax plan might help you, hinder you or end up being a big nothingburger for you. If you’re in that top tax bracket and have investment income, though, you might need to think ahead.
Should you realize your capital gains now while they’re still tax-advantaged? Should you defer deductions so you can bring down your 2021 income? Should you be paying for your kids’ education out of 529s, or should you be borrowing every dime you can for that purpose with the expectation that the debt will be forgiven?
All good questions. To help you answer them, it might be best to consult a financial advisor.
