Recently we talked about the tax implications of Covid related income and promised to follow up with Covid-related deductions.
Let’s start with an obvious one – medical expenses. For 2020, taxpayers who itemize may deduct qualified medical expenses that exceed 7.5% of their adjusted gross income. For information on qualified expenses, check IRS Publication 502 . In general, unreimbursed expenses for doctor’s visits, prescription drugs, and medical insurance premiums (including Medicare premiums deducted for Social Security payments) are deductible. Mileage to and from doctor’s offices and pharmacies may also be deducted. However, over-the-counter drugs and supplements are not deductible, and neither are masks, wipes, or other items you purchase due to the Covid threat.
Keep in mind that due to the increases in the standard deduction brought about by the Tax Cuts and Jobs Act (TCJA) of 2017, most taxpayers no longer itemize. The standard deduction for 2020 will be $12,400 for singles and $24,800 for married couples filing a joint return. However, if your medical, state and local taxes, and charitable giving will approach the standard deduction amount, you should track expenses to determine if itemizing is right for you.
Speaking of charitable deductions, there is some good news this year. Taxpayers who do not choose to itemize may deduct up to $300 of qualified donations on their 2020 tax return. Only cash equivalent contributions count, and the $300 limit is per return, not per taxpayer. Make sure to keep receipts if you plan to take advantage of this new deduction.
The IRS provides details on the types of contributions that can be deducted. Basically, you can deduct gifts to churches and non-profits but not to individuals. Even with many thrift stores temporarily rejecting clothing donations, giving a coat directly to someone in need is a nice gesture but not a tax-deductible one.
One deduction many taxpayers count on is for student loan interest. This deduction is allowed whether or not you itemize, but it may not be of much benefit this year. In March Congress passed the CARES Act, a massive bill that included many types of Covid-related assistance; this act automatically put most federal student loans into forbearance and temporarily reduced interest rates on existing loans to 0%.
If you continued to make payments on your loan during this time, the full amount of your payment should have been applied to the loan principal. Since no interest was charged, there is no interest to deduct on your tax return. (Any interest paid prior to the implementation of the CARES Act will still be deductible.) While your deduction may be small this year, be assured you have saved more by not paying interest than you would have by getting the usual deduction.
Finally, with so many people working from home, there is a lot of interest in the home office deduction. Unfortunately, there shouldn’t be. The TCJA eliminated deductions for unreimbursed employee expenses, which is the category home offices fall into for W-2 employees. (Different rules apply to self-employed taxpayers.) Even if your boss directed you to work from home, you cannot deduct any related expenses.
Contact us with questions about this or other tax issues. Continue to wear your mask, wait 6 feet apart, and wash your hands, but don’t worry about missing out on important news about your taxes - rely on us to keep you informed!