Multiple state tax returns is the 'big surprise' of this years filing: expert

Yahoo Finance’s Zack Guzman and Akiko Fujita discuss tax and retirement outlook with Marty Davidoff, Prager Metis National Tax Controversy Partner-in-Charge.

Video Transcript


ZACK GUZMAN: Welcome back. In this week's Tax Time, we're breaking down some pretty important changes to the way that taxes are handled in regards to the pandemic. We already discussed how unemployment insurance was impacted by those tax changes, but what about retirement? There are a lot of key things changing and penalties getting waived after the pandemic.

And here to break that down with us is our expert for this week, Marty Davidoff, Prager Metis National Tax Controversy Partner in Charge joins us right now. And Marty, the key thing here I think is a lot of people might overlook some of that penalty getting waived here. So talk to me about how retirement decisions should be changed in the wake of that pandemic.

E. MARTIN DAVIDOFF: Right, well, if you were impacted by COVID, they are eliminating the 10% penalty on your early withdrawals. So essentially, who's impact by COVID? One who's diagnosed with COVID, one whose spouse is diagnosed, and then one who's experienced adverse financial consequences. And if you look at the details of what it is, it's pretty broad. So that 10% penalty is being waived only, though, up to $100,000 of money that you took out.

AKIKO FUJITA: What are some other factors you think those in retirement should consider? We've been talking so much about the changes that have come as a result of what's played out over the last year, particularly under the CARES Act. As you talk to your clients, what are some significant changes that you think could catch them a bit by surprise as they file their taxes?

E. MARTIN DAVIDOFF: You mean other than the retirement things. I mean, some of the changes are, first of all, you've already mentioned the $10,200 that's being excluded on unemployment. That was just done this month through legislation. And as a result of that, people think they have to amend their returns. So the first thing is, you don't have to amend your returns. The IRS is probably going to come up with a fix if you didn't exclude that.

Some of the surprises are going to be that people are thinking, oh, I can deduct a home office, you know, now that I'm working at home. But the law changed in 2017. You can't deduct a home office anymore. So you're not going to be able to do that. They eliminated all miscellaneous itemized deductions. So in terms of, you know, that kind of thing, that's going to be a little bit of a surprise where people thought they might be able to deduct and itemize deductions for an office.

But the big surprise is what states you may end up having to file. So if you've moved out of New York City and said, I'm going to go to my parents' house or my children's house in Connecticut, and you went there last March and you stayed there through December, you may have to file as a resident in two states. You may have to file both in New York as a resident because that's your domicile. That's where you-- you know, your permanent residence is. But you may also have to file as what is called a statutory residence because you spent more than 183 days in Connecticut.

ZACK GUZMAN: Yeah, you're preaching to the choir here, Marty, as I moved. But also, I want to hit back on the retirement question there, because there was also that extension of the redeposit or a redistribution into a retirement account to avoid taxation when we talk about that window. How important is that for people who may have had to tap things in the pandemic?

E. MARTIN DAVIDOFF: Well, you know, if you did take money, again, this is-- you know, if you did take money, you have the ability to put money back for up to three years. So let's say you're about to file your return. Usually, there was a 60-day rollover period. That 60 days has now been extended to three years. So you could, with your tax return that you file now, you could say, oh, I'm going to the money back in now, and then not have to pick up that income at all.

So remember, when you pull out money from a retirement plan, there are basically two taxes you have to consider. One is your normal income tax. And the other is the penalty for withdrawing early. And the penalty for withdrawing earlier is what we talked about a few minutes ago. You still normally have to pay your income tax. But they'll allow you to put the money back in within three years.

So let's say you file your 2020 return and you didn't put the money back in, but maybe in 2022, you put the money back in, but you'll be able to amend your 2020 income tax return because you rolled it over, and you'll be able to get your money back. So there's this three-year rollover. And the decision you need to make now upon your filing of your return is, do I want to put-- roll that money over now or some of it now so I don't have to pick it up all up and file an amended return later? Does that clarify that?

ZACK GUZMAN: I think it does.

AKIKO FUJITA: Marty Davidoff, Prager Metis National Tax Controversy Partner in Charge, it's good to talk to you today. Appreciate your time.

E. MARTIN DAVIDOFF: Great talking to you. Have a great day.