The coronavirus pandemic upended almost everything in our lives last year, so it came as little surprise when, in an effort to support American taxpayers — and perhaps catch its breath after issuing three rounds of stimulus checks — the Internal Revenue Service extended the 2020 income tax filing deadline to May 17.
But that’s not the only thing that may make things interesting for filers. For the millions of people who worked from home (or from a new state), and the millions of others who received unemployment when businesses shuttered, Tax Day could be slightly more complicated this year.
Keith Fogg, clinical professor of law at Harvard Law School, and his students in the Federal Tax Clinic, answered Harvard Law Today’s questions via email about some common issues taxpayers are facing this year, how their clinic is helping low-income taxpayers, and how President Biden’s proposed changes to the tax code and IRS might affect next year’s filings.
Harvard Law Today: A Gallup poll from October 2020 found that more than half of American workers “always” or “sometimes” worked from home last year. What does that mean for taxpayers?
Keith Fogg: Working from home should not have much of an impact on federal taxes for most taxpayers. There might be some additional deductions that individuals can claim as a result of working from home, but in general, the location of the work site will make little tax difference.
The unusual circumstances of 2020 caused some issues for individuals and business that would not occur in a normal year. Congress has passed legislation to deal with some of the more obvious tax implications of everyone staying home, but may not have covered everything. Some examples occurred in the area of child care assistance programs, medical savings accounts, credits based on working, and others.
Because people stayed at home and may not have used child care, either because it was not open or because they chose not to do so, some people might have had some dependent care funds set aside through their employer that were not used and need to carry those over. Some people may have had health savings accounts they did not tap because they stayed home and did not go to the doctor. Many individuals at the lower end of the income scale lost their jobs. Some benefits pushed out through the tax code, like the earned income credit, are based on earned income. Congress passed legislation allowing individuals to choose to use their 2019 income to qualify for or to receive a higher amount of the earned income tax credit in 2020.
The pandemic caused a shift in many people’s income for a variety of reasons and Congress created stimulus payments and other targeted relief provisions to try to address the more common types of problems, but generally speaking, just working from home rather than an office does not have a significant tax impact.
HLT: We have all heard stories about people who, because they were able to work from home, decided to move to another state. With their employer in one state and their residency in another, what implications might tax filers face?
Fogg: We expect to see varied results of cross-state border employment and the taxation of income generated from that employment. A key factor in the future of this dispute is currently pending before the Supreme Court of the United States.
In the case of New Hampshire v. Massachusetts, the Supreme Court has been asked to invoke original jurisdiction to determine whether a new Massachusetts tax rule is unconstitutional. The tax rule at issue subjects nonresident individuals earning income for services performed outside of Massachusetts to the state’s income tax, if the nonresident provided pre-pandemic services within Massachusetts. If a current resident provided pre-pandemic services outside of Massachusetts, then they will be eligible for a credit for taxes paid to that other state, to the extent allowable. One tax professor and several interested organizations and states have submitted amicus curiae briefs in support of New Hampshire’s unconstitutionality argument.
The U.S. Supreme Court has been asked to decide whether people working from home in New Hampshire for employers in Massachusetts have to pay income tax to the Bay State.
The typical person targeted by this legislation lives in New Hampshire, and pre-pandemic, commuted to their job in the Boston area. Because of the pandemic, the individual stayed at home to work. Since New Hampshire has no income tax, the individual argues that the work performed in New Hampshire becomes income earned in New Hampshire not subject to state income tax, rather than income earned in Massachusetts subject to a 5% state income tax.
Generally, Massachusetts residents are taxed on all of their income. Nonresidents are taxed on gross income from sources within the Commonwealth. Massachusetts established the aforementioned directive in order to prevent the double taxation of its own citizens, as with the convenience of the employer test found in other states. However, in establishing the guidance, Massachusetts may lead nonresidents, who do not receive an income tax credit in their resident state for state tax paid to other states, to be double taxed.
This is not the first case of its kind, but I believe it will prompt other states to take action and may even provide a platform for legislative intervention. The taxation of telecommuters is unlikely to go away without an act of Congress.
HLT: Of course, many Americans could not work from home last year either because they were classified as essential workers or because they lost their jobs. Are there any special tax implications for essential workers or the unemployed as they file 2020 taxes?
Fogg: Most essential workers performed work in the same manner that they did before the pandemic. This made them heroes to our society but really did not change their tax situation much from prior years.
For individuals who were unemployed for part or all of 2020, Congress made a couple of changes which we may see adopted by most state and local governments with income tax regimes. First, Congress allowed individuals to use their 2019 income to qualify for the earned income tax credit, as I described above. Second, Congress exempted the first $10,200 per person of unemployment income from tax. This second change provides a huge benefit to unemployed individuals. Many individuals receiving unemployment compensation do not realize it is taxable. They did not have tax withheld from their payments and did not make estimated tax payments on this income during 2020. Without this legislation, they faced a tax liability when they filed their 2020 tax return. Since most individuals receiving unemployment in 2020 needed all of the money in order to stay afloat, the relief provided on this issue kept a large number of people off of the federal and state delinquent tax rolls.
Many individuals receiving unemployment compensation do not realize it is taxable.
Although not directly responsive to this question, Congress also built into the first two stimulus payments relief for individuals who owed past due taxes and other debts. It exempted the stimulus payments from offset against taxes and other federal and state debts (except past due child support), allowing almost all individuals to receive the stimulus payment rather than having the money go from one pocket of the government to another.
HLT: What types of cases are you seeing these days in the Federal Tax Clinic? Are there any new problems you’re seeing this year?
Fogg: Most of the cases coming into the tax clinic this year are similar to the cases we have received since the clinic opened in 2015. We represent many low income individuals who owe the IRS or the Massachusetts Department of Revenue (MA DOR) and cannot pay the liability. We work with the IRS and MA DOR to compromise these liabilities or to obtain another form of hardship relief. Individuals who owe the state can have their driver’s license and other licenses taken. While we do not represent many individuals who owe the IRS more than $50,000, it is possible for the IRS to take your passport if you owe that much.
In addition to collection cases, we represent a number of individuals under audit for claiming the earned income tax credit. Sadly, the IRS audits low income individuals at a rate equal to the audit rate for the highest earners. The issue in most earned income tax credit cases turns on residence or relationship and the facts can be difficult to establish. We also represent a number of individuals who have filed a joint return with a spouse or prior spouse and now seek relief from the joint liability created by such a return. Because of the gig economy, we also represent a number of individuals who are self-employed but who may not have entered self-employment with an awareness of the tax issues that being self-employed can bring.
Sadly, the IRS audits low income individuals at a rate equal to the audit rate for the highest earners.
The change in clientele caused by the pandemic has primarily brought us individuals who cannot get through to the IRS. Just as individuals were set back by the pandemic, the IRS was set back. It is severely behind in processing returns, processing payments, responding to correspondence, and many functions that, pre-pandemic, it handled in a relatively quick fashion. One clinic client settled her Tax Court case with the IRS last August and is still waiting for her refund of almost $10,000. For her, this is a huge amount of money, but the IRS seems too broken to be able to process the refund. It will pay interest when it eventually pays the refund, but in the meantime, the client is very much in need of the funds with no way to access them. Many other taxpayers face similar problems in reaching resolution with the IRS because of the impact of the pandemic on the IRS. The pandemic struck in the middle of the filing season last year, causing a huge disruption at the IRS. Additionally, Congress placed on the IRS the responsibility of sending out the stimulus payments. Anyone trying to work with the IRS experiences the difficulties there caused by this disruption.
HLT: Finally, looking ahead, President Biden has said he wants to implement changes to the federal tax code and the IRS. What will that mean for the future?
Fogg: President Biden’s proposals put a lot of emphasis on increasing the tax rates and decreasing some of the tax benefits for very wealthy individuals. Those proposals to raise taxes will have little or no impact on the clients of the tax clinic but could significantly raise the rates for high income individuals.
Moving past the proposed changes to the tax rates, there is much discussion of giving additional money to the IRS. How this will impact low income and other taxpayers depends on how the money is spent. The IRS needs to greatly improve its customer service. Over the last decade as its budget has declined, the IRS has significantly reduced the Taxpayer Assistance Centers where taxpayer can walk into the IRS to ask questions and obtain assistance. IRS has also seen its telephone service significantly decline. Some statistics this filing season showed that only 2% of callers could get through to speak to someone at the IRS. If the IRS puts additional resources to these customer service items, it will provide a particular benefit to low income taxpayers and a benefit to taxpayers in general. To the extent it uses the additional resources for enforcement, taxpayers at all income levels can expect that unpaid taxes will receive greater attention and filed returns will be audited at a higher level. Some of the language regarding enforcement suggests it will target taxpayers in the higher income brackets, but I suspect taxpayers at all levels may feel the increased activity.
Finally, Congress has chosen to provide a significant benefit to children and parents of children by greatly expanding the child tax credit. This will be a great benefit to low income families but will be very difficult for the IRS to administer. It will be interesting to see if the IRS can create a workable system in the very short time it has been given. It will also be interesting to see if this benefit only occurs in 2021 or becomes a permanent part of the way the IRS interacts with families having qualified children. Because of the dollar amounts at issue, I expect the child tax credit to create even more disputes about the entitlement to claim a child as a dependent — something that is a regularly featured issue in our clinic.