There are several reasons why your tax refund could be less than what you expect – or you may even have a balance due.
Why your tax refund might be less than you expected
For most Americans, tax returns are the biggest single financial transaction of the year. And not getting a tax refund, or a smaller tax refund than you anticipated this year can cause some concern. It could mean making the decision to not purchase items you and your family need, not being able to pay down debt and bills, or add to your savings account for future needs.
Let’s take a look at why this might happen to you this year and what you may be do about it – or at least plan ahead.
If you can check off any of the below items, you WILL have a different tax return experience than last year, but we have tips to help prepare you before you file your 2020 income tax return.
Do any of these experiences apply to your personal situation in 2020?
- Collected unemployment benefits
- Became self-employed (full or part time)
- Had any kind of change in your job (furloughed, laid off, worked from home, worked multiple jobs, or retired)
What could cause my tax refund to be lower?
A lower-than-expected tax refund could be caused by one or more of the following items:
1. Unemployment Benefits
According to the United States Department of Labor, nearly 60 million people have filed for unemployment since March 2020. Unemployment benefits are subject to federal and state taxes – like any other source of income. State unemployment benefits you received, as well as the additional $600 a week coronavirus relief provided by the federal government under the CARES Act, are considered taxable income on your 2020 tax return.
What you might not be aware of: Income tax withholdings work differently with unemployment benefits because there is no automatic tax withholding. This means taxpayers must opt in or elect to have taxes withheld from their unemployment benefits. Understandably, most folks who are unemployed don’t elect to have taxes withheld from their benefit payments.
Also, there’s a catch: even if you elected to have taxes withheld on these benefits, tax withholdings for unemployment benefits are only available at a 10% rate. A 10% withholding rate is often not enough, especially if taxpayers qualified for the extra $600 a week from the federal government. If you did not request withholdings, you’ll want to consider setting aside a portion of your unemployment benefits or other earnings in the coming days for possible taxes due come Tax Day.
The influx in gig economy and part-time jobs this year was exceptional. Many people became self-employed for the first time to make ends meet and aren’t aware that there are tax implications and other tax laws that are now applicable to them- many for the first time. Did you or someone you know start doing ride sharing, become delivery drivers, consult or coach, make and sell masks or other craft items, become dog walkers, tutor, babysit, clean homes, landscape, or any other side hustles this year? Becoming self-employed and working in the gig economy will have a significant effect on your 2020 tax return.
You may think you want to consider keeping self-employment or side hustle work as “money under the table,” but you should not. Not only are you legally required to report this income, but many folks do not realize that there may be significant tax deductions and tax benefits available on your hard work. Sometimes your investment, and out of pocket costs and expenses, can even be more than what you actually earned. Like gas and travel expenses, office supplies, phone and internet bills, vehicle use, and other startup costs. These are deductible expenses that will lower your tax liability on your side gig work and maybe even on other income that you have.
If you’re newly self-employed, you may now have to make quarterly estimated payments. Quarterly estimated taxes are due on April 15, June 15, September 15, and January 15. If the 15th falls on a weekend, or a holiday, then the due date is the next weekday.
Use this Self-Employment Tax Calculator to estimate your tax bill or refund. Failure to pay taxes correctly over the time you earn side gig income could risk penalties and interest charges come tax time. Know the rules. Have less risk.
3. Unexpected Job Changes
Let’s be real: due to stay-at-home orders, most people experienced unexpected job changes this year. Whether you were furloughed, started a side-gig, worked part-time, started a new business, or even began working from home for all or part of the year. All of these changes may affect taxpayers 2020 tax returns and in many different ways.
If the pandemic required you to work from home, you might think you can claim your home office as a deduction on your 2020 tax return. Unfortunately, after tax reform passed in 2018, working from home as an employee generally does not qualify for a home office deduction. However, taxpayers who are self-employed may qualify for a home office deduction. Keep your office area separate from your family and keep good records of when you use the office.
If you retired this year, you’ll also have a different tax filing experience this year – perhaps the biggest life change you have had in years or decades. Generally, your retirement income is reported on a form 1099-R. Once you choose to start drawing from Social Security, you should receive a form SSA-1099.
Additionally, remember that all income is taxable – even if you worked multiple jobs. You’ll need to report all W-2s, 1099s, and other income you receive.