COVID tax traps to avoid

The havoc from COVID-19 is laying traps for families that they might not realize they’ve fallen into until it’s too late to fix them.

While it would be easy to write that sentence about all types of daily activities in our new COVID-19 world, including returning to school, playing sports or eating in a restaurant, the risks I’m talking about have to do with the way changes in life today could impact families when they go to pay their taxes next year.

With a junior in high school, my family spends a lot of time talking and thinking about college.

From the time my two kids were babies, we’ve tried to stash a little bit of money away every month in a 529 college savings account. The plans are similar to retirement accounts in which investments are able to grow tax-free as long as they are used for qualified educational expenses, including college tuition and room and board.

Many college students are facing a much different experience than what any of us anticipated. Schools have adopted a number of approaches from hybrid learning to fully remote options. In some cases, tuition, fees, room and board, and other expenses are being reimbursed or credited to student accounts when colleges or students move to online classes.

But there’s a real risk that unless the U.S. Congress or the Internal Revenue Service act, families could face steep penalties and unexpected tax bills when they file their taxes next year if they haven’t taken care to follow the rules on refunds.

As the Washington Post reported earlier this month, “Distributions from a 529 plan need to match up with qualified expenses incurred during the same tax year. An account holder has just 60 days from the date of the refund to return the money to the 529 account without incurring taxes and the 10 percent penalty on earnings.”

The situation is easy to see coming – if you know to look for it. 

Your student can’t return to campus because of COVID-19. You’ve already paid the bill, so the school credits your account and you figure it’s easier to just let the money ride for the spring semester. 

If you do, your expenses and your distribution might not match up in the same year. And that’s when you could face a surprise tax bill.

That’s not the only problem to watch out for. 

With unemployment in Maine at almost 10 percent, it might seem a little strange to issue a warning for people who are still working, but here it is.

COVID-19 forced many who could to transition to working from home, and once employees and their bosses realized that the arrangement worked reasonably well, a new world of opportunities started opening up.

Remote work opened the world for people to get out of the office and continue to collect a paycheck. But there’s a catch.

As the Portland Press Herald pointed out this week, remote workers who have split time between two states might need to file income taxes in both places. The rules from state to state vary. Maine Revenue Service has put together a group that’s working on policy guidance, but information could be several weeks away.

Meanwhile, Congress is considering the Remote and Mobile Worker Relief Act that could provide some relief, or at least make sure that states are consistent in the way they apply the rules for paying income taxes while working remotely during the pandemic.

But it’s safer to hold your breath as a way to avoid COVID-19 than it is to hold your breath waiting on Congress to solve a tax problem that isn’t just a giveaway to billionaires and corporate behemoths. 

COVID-19 has forced the world to change in drastic and uneven ways. Almost every aspect of daily life has been affected. Taxes are no different. I hate to add a worry, but pay attention to what’s happening on the tax front. 

So be careful. You don’t want to get sick with COVID-19, and you don’t want to be sick next spring because COVID-19 causes you to have a big – and unexpected – tax bill.

David Farmer is a public affairs, political and media consultant in Portland, where he lives with his wife and two children.