No matter what the year brings or how many times the due date is delayed, the old idiom holds true: the only two certainties in life are death and taxes.
Military-connected businesses and families -- veterans, military members and spouses -- are no different. But we asked Jo Willetts, Jackson Hewitt's Director of Tax Resources if there's anything these businesses should know about filing taxes for 2020 -- especially now that COVID-19 and the CARES Act has made the 2020 filing year... interesting.
Jackson Hewitt has some special recommendations for filing for 2020 when the due date comes in 2021. But Willetts has a big caveat:
"It's always a good idea to involve a tax professional early on for personalized tips and suggestions to help save on taxes and jump start earnings."
With that in mind, here are some things to prepare for tax time.
1. It's Always Better to File a Joint Return
Filing a separate return often results in a greater tax liability, even if a spouse runs a side business separate from military income. Many credits and deductions are either not available or phased out much earlier than if the couple files a joint return. Military spouses also do not qualify for Head of Household status when the active duty member is deployed or on overseas duty.
"In order to qualify for Head of Household, there has to be a change of address for the military member with no intention of coming back to the marital home," Willetts says.
2. Estimate Taxes Quarterly
When a military spouse is running a business from the home, they must file an estimated tax payment every quarter. The Internal Revenue Service has a handy tax withholding estimator for anyone who needs estimating their net profits and submitting their W-4.
Again, the plan should be to file taxes jointly because more credits and deductions will be available to the family than if taxes were filed separately.
3. Keep Your Home Office Physically Separate
While many are working from home in 2020, home businesses separate from 9-5 jobs can claim a home office write-off on their taxes. This space has to be physically separate from other family members and guests to be considered tax-deductible.
4. Business Taxes Are More Than Federal Income Taxes
In addition to income taxes on the income from a side business, a military spouse will also pay Social Security and Medicare Taxes, referred to as SE taxes, on their income. The spouse will also have to pay state and municipal taxes, if there are any to be paid (check your local area).
"This is what bumps up the tax bill quickly," says Willetts.
5. Those Side Gigs Are Taxable
Being a ride-share driver or selling goods on Etsy or other platforms is self-employment income. All business income, whether reported on a Miscellaneous Income form (Form 1099) or not, is considered taxable income and should be included on business forms.
6. You Can Still Save for Retirement
Taxpayers should set up a self-employed retirement plan and pay themselves as they go along; they may be working for themselves, but they can still save for retirement. Small business owners can set up tax-deductible retirement plans, even for themselves, and profit-sharing retirement plans for their employees.
7. The CARES Act Comes With Taxable Income
While the 2020 stimulus checks won't be taxed next year, all unemployment income is taxable income -- including the $600 bumps. When asked, states can withhold taxes from unemployment checks, but can only withhold 10% of unemployment income.
Extended unemployment can come back to haunt families as well. Some tax credits, including the Earned Income Tax Credit (EIC) and Child Tax Credit required earned income -- that is, not unemployment income. To qualify for the EIC, taxpayers need some form of earned income. For the Child Tax Credit, taxpayers need to make at least $2,500
8. Consider an Estimated Payment
Even if you aren't running a side business but depend on certain tax credits every year, Jo Willetts suggests making an estimated tax payment using the IRS' aforementioned tax withholding tool. It could help manage any tax surprises when filing for 2020.
9. Spouse-Run Business Owners Can File for Unemployment
This is a new development with the onset of the COVID-19 epidemic. If the military member, or their spouse, has a small business that is no longer able to operate due to COVID-19, they may be eligible for unemployment.
"This is a new idea and only eligible to self-employed taxpayers with a business unable to operate during the pandemic," Willetts says.
10. Gifting Money is Taxable Income
If you or your family has been helping another individual or family out during the economic crisis to the tune of $15,000 or less, look out. When it's under that amount, the giver is responsible for any applicable federal gift taxes. The gift of money needs to be substantial and over $15,000 in order for it to be taxable to the recipient.
"Money gifts aren't taxable if it's given to a husband or a wife who is a US citizen ... Or it's paid directly to an educational or medical institution for someone's medical bills or tuition expenses," Willetts says.
As always, Jo Willets and Jackson Hewitt recommend consulting with a tax professional for any situation that puts you, your family or business in unfamiliar territory.
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