Did you work remotely in a different state during the pandemic tax year of 2020, get unexpectedly laid off from your job or take a temporary pay cut? The answers may have an impact on how you file your income taxes next month.
These and other topics were demystified during the second installment of #MoneyTalk, a panel discussion about managing personal finances organized by the employee resource group Women @ Meredith. [Meredith is PEOPLE's parent corporation.]
Catey Hill, editor of Millie, recently asked three tax experts — Lisa Greene Lewis, Kelley Long, and Ellen Stark — to weigh in on the most common questions during what might be considered the most unusual tax season ever.
Don't wait until the last minute to get organized, cautioned Greene Lewis, certified public account at TurboTax.
"You can miss some forms that report your income and you can also miss out on some receipts that report expenses that you paid, which could be worth valuable tax deductions and credits," she said. "I would just say, don't wait; gather all of your documentation so you don't miss anything."
Added Stark, financial editor at Foundry 360: "If you're getting income from a lot of little places, it's easy to miss a tax form and it's easy to miss a 1099 for some interest on a bank account you forgot you had. Obviously, keep an eye on all your tax forms…"
Long, both a certified public account and a certified financial planner, said, "Just don't ever ignore a letter from the Internal Revenue Service — even if you just write or call and say, 'I'm working on this. I need an extension.' The IRS is actually quite flexible on stuff, believe it or not…"
If I Worked Remotely in a Different State, Will I Be Double Taxed?
"For people who worked remotely in a different state, there's all this talk, like, 'Am I going to get double taxed? What's going to happen?' A lot of panic I heard is out there," said Hill.
"That is a common trend that happened this past year" due to COVID lockdowns, added Greene Lewis, who explained that there are "a few" factors in play that determine "whether you're going to be taxed in two states."
"The first thing is how long you've been in the other state," Greene Lewis continued. "Second, your domicile, so that's where your personal belongings are. Also, keep in mind, certain states have reciprocal agreements. If you live in a state that has a reciprocal agreement with another state that you worked in, you may not have to pay taxes in the two states…If you were in another state for 183 days or more, you may be taxed in the other state as well as your domicile. They'll look at where you're registered to vote, your Department of Motor Vehicle records, and some things like that, but the key thing to think about is how long you've been in the other state."
To check if the state where you worked remotely and the other state where you were living had a reciprocity agreement, go to the IRS website.
Since I Am Working from Home, Do I Qualify for a Home Office Deduction?
Many people have been working from home since March 11, 2020, when the World Health Organization announced COVID-19 a pandemic. However, that doesn't automatically qualify as a deduction.
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"A home office deduction is only available to people who file Schedule C forms; they run their own business, they're a freelancer, a consultant," Stark said. "If you're on a payroll getting a W-2 form, you're a regular employee. You can't take a home office deduction, I'm sorry to say."
Are the Federal Stimulus Checks I Received Taxable?
"It's not taxable," said Long. "This is the good news part, because this is a tax technicality. It's considered a tax credit; it's not considered income."
The stimulus checks, formally known as Economic Impact Payments, have been based on your 2018, 2019 or 2020 tax year information — whichever was the most recent the IRS had on file at the time the checks were dispersed.
"If you didn't qualify based on your 2018 or 2019 income, you haven't received a full check, but if you think that you would based on your 2020 income, then file your taxes ASAP," added Long.
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You may be eligible for the $1,400 checks that were just issued by the Federal government. If you are, and either the IRS didn't issue you a stimulus check or they issued less than the full amounts, you can file a 2020 tax return to claim a Recovery Rebate Credit — even if you are not required to file a tax return for 2020, the experts said.
My Employer Temporarily Reduced My Salary. How Does That Affect My Taxes?
If you took a temporary pay cut, there are some important things you should know.
"The first thing is: If you claimed any unemployment or somebody in your family did, then that is federally taxable and you may have had the option to not have any taxes withheld…so just know that could increase your tax due or decrease your refund," said Long.
Also, "Depending on what state you live in, you may or may not have to pay taxes on that. Some states don't tax it and some states don't even have income taxes."
Long added, "If you had a baby or you got married or something changed during the year that would increase your stimulus check, same thing. If you can't file as soon as possible, then there is a form that you'll fill out as part of your taxes. I know TurboTax already has it incorporated into their tax filing software."
Are My Unemployment Benefits Taxable?
"They are taxable," said Greene Lewis, "and that does come as a surprise to some people, which is why, even if it seems really painful to do this because you're so dependent on an unemployment check, to have some federal taxes withheld. That's not going to help you if you didn't do it in 2020, but if you ever have to go on unemployment, just keep that in mind."
Regarding state and local taxes, she added, "Several states — including New Jersey, I believe California and some others — don't tax local unemployment benefits, and then some states don't have income taxes. I believe you don't have Social Security and Medicare taken out of unemployment, so that's another plus, but it is taxable, even though that seems like you're kicking people when they're down."
But beware of identity theft.
"I've read that there's a lot of scams that have gone on the past year of people filing unemployment in other people's names," said Greene Lewis, "so if you get a form that says you got unemployment last year, and you didn't, don't ignore that. That means somebody filed in your name and you should let your state tax authority know."