The Internal Revenue Service began accepting e-filed income tax returns last Friday. It is roughly a month later than normal. Most IRS offices are closed for in person operations, the phone lines have hour long wait times, and there a tractor trailer truckloads of paper returns that still have not been processed from last year. With a very unusual year behind us, there are many pandemic-related tax law changes that went in to effect and should be considered when you file.
Before you file here's what you need to know.
CHARITABLE CONTRIBUTIONS
Thanks to the CARES Act, cash donations made to charitable organizations in 2020 are deductible without having to itemize. If you take a standard deduction, you can deduct up to $300. For a couple, it's $600. You need proof of your gift. For gifts under $250, credit card statements or cancelled checks will work as a receipt. For gifts of $250 or more, you need a written acknowledgment from the charity.
UNEMPLOYMENT BENEFITS
Many Americans found themselves out of work (at least temporarily) after the pandemic shut down a large part of the economy and turned to unemployment insurance for help. Those who received unemployment benefits will need to pay income taxes on that money. You should have received a Form 1099-G showing the amount you were paid and any federal income taxes withheld. If you didn’t get a 1099-G, please contact your state unemployment office or check your state’s unemployment compensation website to access it.
UPDATE: The American Rescue Plan Act of 2021was passed into law on 3/11/2021 changing the taxability of unemployment. See our post to learn more.
STIMULUS CHECKS
Most taxpayers got two economic-impact payments in Round 1 (max $1,200 per person plus $600 per child under 17) and Round 2 ($600 per person plus $600 per child under 17). The good news is your stimulus check will not count as taxable income. Instead, it’s being treated like a refundable tax credit for 2020. If you did not exceed the income or age requirements and were not claimed as a dependent on someone else's return, but you did receive a payment. It's not too late. You can claim a Recovery Rebate Credit on your 2020 tax return. For example, if your income was lower in 2020 than 2019, you may be owed a partial credit. Or, if you were claimed as a dependent on someone else’s tax return in 2018 or 2019 but won’t be for 2020, you may be eligible for the credit.
You should also evaluate if it makes sense to hold off on filing or hurry up and file if there is another stimulus check program. There are rumors that the income thresholds will be reduced from $150,000 for married or $75,000 for single to $100,000 and $50,000 respectively. Keeping that in mind it may make sense to file 2020 sooner or wait.
FILE ELECTRONICALLY AND USE DIRECT DEPOSIT
Like we mentioned before due to COVID the IRS is tremendously behind in processing paper returns. If you need your refund fast, this is not the year to paper file. Did you also know, one out of five taxpayers don’t get their tax refunds by direct deposit? You can provide routing information for up to three accounts—even retirement accounts—on your tax return to which the IRS can send your refund. If there is an additional stimulus payment this could help you get your stimulus check quicker. The sooner you file, the sooner that information can be incorporated, and you can get your refund faster by using e-file and direct deposit.
RETIREMENT PLANS
You can make tax year 2020 contributions to an Individual Retirement Account through April 15, 2021, and take a tax deduction if you’re eligible. For 2020, the limit on annual contributions to an IRA is $6,000 with a $1,000 catch-up for over 50. The SECURE Act also allows owners of traditional IRAs to keep putting money in their accounts past age 70 1/2 starting in 2020.
If you are self-employed or a gig worker you can open a SEP-IRA and contribute up to 25% of your self-employed income. Both of which reduce your Adjusted Gross Income which is used to determine your Recovery Rebate Credit and eligibility for 2020. If you are close to the income thresholds think about funding a retirement account to maximize your stimulus payment.
EARNED INCOME TAX CREDIT (EITC) RELIEF
If your earned income was higher in 2019 than in 2020, you can use the 2019 amount to figure your EITC for 2020. This temporary relief is provided through the Taxpayer Certainty and Disaster Tax Relief Act of 2020.
To qualify for the EITC, you must:
Show proof of earned income
Have investment income below $3,650 in the tax year you claim the credit
Have a valid Social Security number
Claim a certain filing status
Be a U.S. citizen or a resident alien all year
401(K) EARLY WITHDRAWAL PENALTIES WAIVED FOR COVID
If you took a CARES Act 401(k) or IRA distribution in 2020 under the loosened rules for tapping your 401(k) penalty free, you can report all of the income on your 2020 tax return or in equal installments over three years. Alternatively, you can recontribute money back into a retirement account and undo the tax consequences of the distribution.
WORKING FROM HOME
Due to the pandemic, millions of Americans set up a home workspace in 2020, but most people will not be able to deduct any expenses they incurred for work while at home. Unfortunately in 2018 the deduction for unreimbursed employee expenses was removed from the tax code. Only those that work for themselves, can deduct a home office now. The IRS rules are very clear that the area must be regularly and exclusively used for the business purpose as well. You can use the standard $5 per square foot or actual expenses and depreciation.
PPP LOANS ARE NOT TAXABLE
The CARES Act introduced loan programs aimed at helping struggling small business owners stay afloat by offering them Paycheck Protection Program (PPP) loans. As long as these loans were used on qualifying business expenses—payroll, rent or interest on mortgage payments, and utilities, now even expanded to cover some other qualifying costs—these loans were designed to be “forgiven.” It was previously assumed that the costs that constituted the forgiveness would be disallowed from deduction. However in December 2020, the IRS announced that any eligible expenses you paid with money from those PPP loans can be deducted from your taxable income. Be sure not to include these proceeds on your 2020 income tax return, whether or not the loan has been forgiven.
EIDL GRANTS ARE NOT TAXABLE
The CARES Act also introduced the Economic Injury Disaster Loan (EIDL) Advance. This advance was for small businesses applying for the EIDL Loan program. Businesses that elected to do so could qualify for a grant of up to $10,000 or $1,000 per employee. The proceeds from this grant are not taxable and should not be included on your income tax return.
REQUIRED MINIMUM DISTRIBUTIONS
If you own a traditional IRA, you are required to take money out of your account once you reach a certain age. Those withdrawals are called required minimum distributions (RMDs). The SECURE Act pushed back the age for RMDs for traditional IRAs from 70 1/2 to 72 (if your 70th birthday was July 1, 2019 or later). The CARES Act also allowed seniors to skip RMDs altogether in 2020 without penalty.
If this year sounds intimidating to you and you would prefer to enlist the help of an expert, give our team a call.