How COVID-19 May Affect Your 2020 Tax Return
Tax time always brings about a feeling of stress, but this tax filing season could be more stressful than usual. To help people navigate the health crisis and stimulate the economy, new laws were enacted, changes were made to existing laws, and stimulus payments were sent to many. What does that mean to you and your tax liabilities?
Economic Impact Payment: If you received a stimulus payment in 2020, this is considered a refundable tax credit and it does not need to be reported as taxable income on your 2020 federal income tax return. If you received an Economic Impact Payment that was less than expected or did not receive one and believe you were eligible, you can claim a Recovery Rebate Credit on your 2020 return. If you received a larger payment than you were entitled to, you will not be penalized.
Unemployment Compensation: If you were unemployed in 2020 as a result of the pandemic, the Pandemic Unemployment Assistance program provided an additional $600 per week and expanded unemployment insurance to those who weren’t traditionally covered by UI (ie: the self-employed, contract workers, and gig workers). If you did not have any tax withholding taken out of these payments, you will owe federal and possibly state income taxes on those payments (Pennsylvania and New Jersey do not tax unemployment benefits). If you received unemployment benefits, you should have received Form 1099-G which will show the total amount of UI benefits paid and the amount of taxes that were withheld, if any.
“Lookback” rule and tax credits: If you take the Earned Income Tax Credit or the Child Tax Credit, the IRS will allow you to pick whether the income reported in 2019 or 2020 will provide you with the greatest benefit in order to claim these credits.
Charitable Contributions: A temporary deduction is available for charitable cash donations made to qualified charities. Taxpayers can deduct up to $300 for cash donations given to charity even if they use the standard deduction and don’t itemize deductions. This is an above-the-line deduction which means it will reduce both adjusted gross income and taxable income and as a result reduces the amount of federal income tax owed.
Retirement Plans and Accounts: The Coronavirus Aid, Relief, and Economic Security (CARES) Act included several provisions regarding retirement funds and income.
Required Minimum Distribution Waivers: The CARES Act suspended the required minimum distributions in 2020 for retirees and for the beneficiaries of inherited accounts. If you did not take the RMD, or you returned the amount by August 31, 2020, you will not be required to include the amount as taxable income for 2020. If you didn’t return the RMD, it will be taxable as a distribution from an IRA.
Retirement Plan/IRA Distribution Waivers: If you took an early withdrawal from your employer’s retirement plan, 401(k), or IRA in 2020 for coronavirus-related reasons, you are exempt from paying the 10% additional tax on this early distribution. However, you must repay the early distribution over the next three years.
Retirement Plan Loan Relief: If a loan was taken out against an eligible retirement plan, the repayment amount due can be delayed for up to one year. Note that although payments can be deferred for up to one year, interest will continue to accrue, and it is not tax deductible.
More so than ever before, everyone benefits from the advice of a tax professional. 2020 presented many challenges and we are here for you this tax season. Not only can we ensure this year’s return is prepared correctly, we can advise you on tax planning strategies for the future.