What You Need to Know About Taxes If You Moved in 2020
Last year created many unusual situations for taxpayers. Some people were working from home or working from a different state than where they normally live. Additionally, those who sold a home in 2020 may be wondering what to do about their profits from the sale of real estate, especially if they didn’t roll that income into the purchase of another home. And if they liquidated assets to pay for a new home amidst the home-buying frenzy that occurred in 2020, they could also be looking at a higher tax bill or, at a minimum, confusing tax returns.
“For the many people who moved, worked from multiple states or bought or sold a home, their taxes may be extremely messy,” says Tony Molina, CPA and senior product specialist at Wealthfront.
And while the government delayed the start of tax filing season to Feb. 12, the deadline to file and pay taxes due remains on April 15, 2021. That means you have less than two months to figure out how much you owe in federal taxes, which states will require you to file tax returns and how to avoid capital gains tax on home sales or investments.
Let’s take a look at some of these scenarios and find out the best ways to reduce your tax liability so you’re not looking at a hefty tax bill on April 15.
Determine Where You Have to File State Taxes If You Worked Remotely
States have different rules and regulations regarding employees who live in one state and work in another. Some states have reciprocal tax agreements, which means you only pay state taxes for the state where you live, not where you work.
If the states where you live and work don’t have a reciprocal tax agreement, then you may have to file income tax returns in both states. However, most states will allow you to file for a tax credit for the taxes paid in the state where you work.
What if you’re temporarily working from the state where you live due to the pandemic, but your employer’s office is based in another state? You may still have to file taxes in the state where your employer is based if you live and work in another state out of convenience, The Wall Street Journal reports. States where employees pay taxes in their employer’s state under this convenience rule include Arkansas, Connecticut, Delaware, Nebraska, New York and Pennsylvania, according to the American Institute of CPAs.
Wade Schlosser, Founder and CEO of Solvable.com, adds, “Determining what state taxes you need to pay if you live in one state and work in another can get complicated. It’s wise for anyone new to this situation to consult with a tax professional before filing. You don’t want to pay more than you owe because you don’t understand the tax laws for the states where you live and work or pay penalties because you didn’t file correctly.”
Minimize Taxes from the Sale of a Home
In spite of the pandemic, the seller’s housing market persevered in 2020, with existing home sales up 0.7% in December from the prior month, reaching their highest level since 2006, according to the National Association of Realtors. Additionally, U.S. median home prices hit their highest point ever in 2020 at $320,000, according to The Mortgage Reports.
That means if you sold your home in 2020, you likely walked away with a hefty profit. And you may have opted to rent, live with family or live in a second property rather than buy a new home.
Fortunately, apart from home sellers in higher-end markets, most Americans do not have to pay capital gains tax on the sale of their home. Single people don’t pay capital gains tax on the first $250,000 in profits, while married couples filing jointly enjoy double that exemption, according to the IRS. You need to live in the home for at least two of the past five years to claim the exemption.
If you do have capital gains tax on profits from a home sale, you may be able to exclude some of those profits due to work, health or an unforeseeable event, according to the IRS. This could include the pandemic, so it’s important to check with a tax professional.
You can also deduct the cost of any home improvements over the time you’ve owned your home. “The cost basis of your home not only includes what you paid to purchase it, but all of the improvements you’ve made over the years,” Steven Weil, an enrolled agent and president at RMS Accounting in Fort Lauderdale, Florida, told NerdWallet.
Minimize Other Capital Gains Tax Through Tax-Loss Harvesting
Many people cashed out investments in 2020 to make it through lay offs or business losses that occurred during the height of the pandemic. Similarly, people may have liquidated investments at a profit to fund the purchase of a home, especially if they moved from a city apartment to a suburban house for more space during the pandemic. “If you incurred any losses from investments [such as stocks or ETFs] during 2020, you can use those to offset these gains,” Molina says. “This strategy, called tax-loss harvesting, allows investors to offset capital gains with capital losses as well as up to $3,000 in ordinary income.”
The 2020 tax season may not be as bad as you feared if you follow these tips and consult with a tax professional to ensure you’re not paying more than you have to in state and federal taxes this April.
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