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Tips for overcoming work-from-home complications when filing taxes

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Yahoo Finance’s Alexis Christoforous and E. Martin Davidoff, Prager Metis Partner, discuss how to navigate filing taxes amid the pandemic.

Video Transcript

[MUSIC PLAYING]

ALEXIS CHRISTOFOROUS: Believe it or not, tax season kicks off less than a month from now, February 12, to be exact, that's the day the IRS will start accepting your filing. And chances are, your tax returns are going to look different this year after last year's two stimulus packages. Joining me now is E. Martin Davidoff. He is a partner at Prager Metis. Marty, good to see you.

So, you know, for a lot of folks, I think their taxes are going to be more complicated than usual due to unemployment benefits, perhaps they were working more than one job. As we get our paperwork prepared and get ready to fill out our taxes, what are some things we should be doing right now?

E. MARTIN DAVIDOFF: Well, first of all, you need to know what state you're going to be reporting in. If you're in the New York, New Jersey metropolitan area and you used to file it all in New York state and now you're working at home in New Jersey all the time, the question will come up, do I now still report the number of days in New York that I used to work?

And New York is taking a position that they're actually being sued by New Jersey. They're taking the position that if you used to work in New York but now you work in New Jersey, we're going to still want to tax you. So New Jersey is suing them saying, don't do that. Now, when it comes to the taxpayers right now, there's very little guidance for them to rely upon because the two states are battling.

So what we're advising our clients to do is, first of all, watch the news very carefully to see if anything comes from the Supreme Court. See if Congress steps in and tries to standardize what's going to be taxed to who. And finally, we may just say, listen, take the more conservative route. Pay New York, take your credit to New Jersey.

Because if you don't pay New York, you may end up being on the other side of an audit. So that's one of the important things. The other thing is too, as you're working at home more and expending costs at home, you can't deduct those as employees. Now, businesses have a whole different gamut to deal with. But employees can't deduct their home office expenses, even supplies.

So they should try to arrange a reimbursement provision with their employer. And it may even make sense to get more reimbursement and cut your salary down. You'll end up with more money after tax, and that's more of a 2021 planning. But for taxes, you know, the state taxes are going to be very difficult for people who are living in one state and working in another state.

ALEXIS CHRISTOFOROUS: Yeah, good tips. And I think you're right. It's always better to err on the side of conservative when you're dealing with the IRS. What should folks do, though, if they know they're not going to be able to pay that tax bill, you know, come April 15? What can they do?

E. MARTIN DAVIDOFF: Well, they can, first of all, get into an installment agreement. They file with their tax return a Form 9465 that says, I would like an installment agreement. And the IRS is going to be pretty generous about allowing them and even not placing a lien on them if they get in early and right up front and say, listen, I'd like to get into an installment agreement.

You'll also be able to do it online. But you should talk to your CPA. And usually, if it's a smaller amount, they can guide you to filling out the Form 9465. But you shouldn't ignore it. And it's also most important to make sure you're paying your current taxes in '21 first before you try to attempt to pay the back taxes because the IRS always wants you to keep current.

Otherwise, you keep digging the hole and getting penalties and interest. So always keep current first. And if it gets complicated, talk to somebody who specializes in doing tax controversy.

ALEXIS CHRISTOFOROUS: Marty, what about the people who got a PPP small business loan, which has been or will be forgiven? What are the tax implications there?

E. MARTIN DAVIDOFF: Well, there was a very big change on December 28 that says that you now can deduct the expenses you used with this tax-free money. So the tax-free money came in, and up until December 28, Congress was saying and the law was saying that you couldn't deduct if the IRS came out with a ruling.

Congress overturned that ruling and said, no, even if you don't have to pick up tax on the income, you can get to deduct it. Now, if it hasn't been forgiven yet in 2020 and you end up having a loss because of the fact that you're not picking up the income but you can deduct the loss, there may be a tax basis issue that won't get resolved until the forgiveness of income happens, which may be 2021.

So if you're in that unusual situation, which a lot of small businesses will be that are pass-through entities, partnerships and S corporations, they should be aware of that and check in with their CPA about that.

ALEXIS CHRISTOFOROUS: And real quick, before we let you go, a lot of people have been dealing with bitcoin. They're holding bitcoin, they sold bitcoin in the past year. What are some of the tax implications? Because I know the IRS treats it a bit differently than it does other currencies.

E. MARTIN DAVIDOFF: Well, that's true. They treat bitcoin as property. In fact, right on the first page of the 1040, it's a question that says, at any time during 2020, if you receive, sell, send, exchange, or otherwise acquire financial interest in a virtual currency, they're really out looking for this, and every time you receive a virtual currency, you may have a taxable event if you received it as income.

And every time you transfer out of a virtual currency, you may actually have two taxable events, one, the sale of that currency because it's deemed property, and then you might have an expense on your business if it was a business expense in using the bitcoin. So yes, they're treating it as property. And if you hold it long enough, it could actually be long-term capital gains.

ALEXIS CHRISTOFOROUS: Awesome advice. Thanks so much, Marty Davidoff, partner at Prager Metis. Thank you.

E. MARTIN DAVIDOFF: You're very welcome. Thank you very much.