This Week In Your Wallet: The Home Office Deduction
“Can I take the home office deduction since I’ve been working from home, basically, all year?” That was the question my daughter’s boyfriend recently asked – although he’s certainly not the only one wondering. Plenty of people have tax questions to be answered.
Welcome to the start of a very unusual tax filing season – it opens Friday – where we’ll be dealing with whether stimulus checks and unemployment payments are taxable, what happens now if you took an emergency withdrawal from your retirement plan, and yes, that home office deduction. Some answers to your tax questions:
Stimulus payments = not taxable.
There were two rounds of payments – the first for up to $1,200 per person, $500 per child under age 17, the second for up to $600 per person, $600 per child under age 17. In both cases you were eligible for a full payment if you had income of up to $75,000 for singles, $112,000 for heads of household, or $150,000 for married couples, then they tapered off and disappeared completely at income of $99,000 for singles, $198,000 for married couples. Tax time presents an opportunity to square up if you didn’t get what you were due. You’ll need to file a return and claim a rebate recovery credit. As Ann Carrns explains in The New York Times, these payments were based on 2020 income but the IRS was working off 2018 or 2019 tax information (don’t blame them, that was all they had). So, if you earned too much to qualify in 2019 but your income dropped in 2020, this is your opportunity to get that money. Also, if you had a baby and the IRS didn’t know about it, this is the chance to claim the credit for that child.
Unemployment payments = taxable as ordinary income.
If you didn’t have taxes withheld from unemployment payments, you will owe those taxes now (both state and federal unless you live in a no-state income tax state). Whether you’ll actually have to come out of pocket to pay Uncle Sam depends on the size of your refund.
Emergency retirement withdrawals = the three-year clock is running.
Although the 10% penalty on withdrawals up to $100,000 has been waived, the income is still taxable. According to the IRS, you have two choices. Pay the taxes equally over three years. (In the IRS example, if you withdrew $9,000, you would claim $3,000 in income for 2020, 2021 and 2022.) You could also pay them all in the year you took the distribution. Or, repay the money to your plan over the same three-year time period and pay no taxes overall. (You still have to report the income over three years, but once the money is back in the plan you can file an amended return and get credit for any taxes paid.)
Home office deduction = if you’re an employee, no-go.
This is one of the most popular tax questions to be answered this season. You can’t deduct the cost of any of the new equipment you’ve purchased either – although your employer can if they reimbursed you. If you’re an independent contractor or self-employed, however, the old home office rules apply. You can deduct a portion of rent/mortgage and expenses that are attributable to the space that is specifically used for doing business or – more simply – just deduct $5 a square foot up to 300 feet. In more complicated matters – if you worked remotely from a different state, you may be subject to income taxes from that state as well as the one in which your work is located. Read this Wall Street Journal article to learn more.
Black Women Building Wealth
A well-documented reluctance among women to invest in stocks has long held women back from building the sort wealth of needed to retire comfortably and accomplish other goals. As the Wall Street Journal’s Carol Ryan reports, a Credit Suisse survey of existing clients “found almost half of its female customers have 90% of their wealth tied up in low-yielding cash and fixed income.” Yikes.
But there is no denying that Black women have it even tougher. This week, HerMoney writer Javacia Harris Bowser dug into the wealth-building ways that have proven most successful for Black women including homeownership, starting businesses, getting a quick-start when it comes to the personal finance basics of budgeting, saving, investing, and learning to overcome setbacks. “Black women, in addition to all the systemic barriers we face, also encounter more life-altering setbacks at a much earlier age,” she quotes Harvard-trained economist Keisha Blair as saying. These setbacks include chronic or serious illness, divorce, or the loss of a partner. Her inspiring, personal take is well worth a read.
Is It Real Or Is It Memorex (And Does It Matter?)
The Washington Post did an interesting take on the shrinking size of weddings – and wedding expenses during COVID. The paper nicely documented how people are spending less on pretty much everything – dresses, food and drink, venues – but putting more into diamond rings which have become a) larger and b) more elaborate.
Then, I turned on CBS Sunday Morning (required viewing in my house) and watched David Pogue’s Valentine’s Day take on the diamond industry, which included not just a trip into a functional (and responsible) mine, but one to a DeBeers lab where real diamonds (indistinguishable from those that come from the earth) are being grown to be sold for $800 a carat.
So, here’s the question. If you were going to frost yourself (or someone else) which one would you go for?
Have a great week,