Like we wrote about last week, COVID-19 changed many American’s financial life in 2020. Many saw their jobs and streams of income disappear, while others saw their income coming in from different places. The CARES Act was passed to help Americans impacted by the virus, and offer economic support. Part of this support had to do with the way taxes are filed for 2020 and creating additional benefits depending on your financial circumstance.
Read on to learn five ways the events that took place in 2020 could affect your taxes.
COVID-19 Impact #1: Stimulus Checks & Tax Credits
Millions of Americans received stimulus checks during 2020 and early 2021 – the first for $1,200 and the second for $600. According to the IRS, if you did not receive these payments (and were eligible to do so) then you may be able to deduct them from your 2020 taxes. There are a few requirements you must meet before filing for this reduction.
- Be a U.S. citizen or resident alien during 2020
- Must not be claimed as a dependent during 2020
- Have a Social Security number for employment before your 2020 tax return is due
COVID-19 Impact #2: CARES Act & Retirement Accounts
The CARES Act allowed individuals with a 401(k), 403(b), 457(b) and Thrift Savings Plan to withdraw their funds without incurring the standard 10 percent tax rate from an early distribution. Instead, these withdrawals were considered coronavirus-related distributions.
If you chose to take a withdrawal during 2020, your taxes may be impacted in a few ways:
- They will count as income tax over a three- or one-year period, depending on your choice.
- They can be repaid before the end of the three-year period to receive a tax refund.
COVID-19 Impact #3: Charitable Gift Deductions
Charitable deductions are often a great source of tax relief for filers. In 2020, the CARES Act provided some changes to charitable donations, allowing filers who take a standard deduction to benefit from charitable donations as well. We wrote about this new deduction a few weeks ago. You can check it out here! Tax filers taking a standard deduction may now deduct $300 of cash donations on top of their standard deduction.
COVID-19 Impact #4: Unemployment Benefits
There are a variety of unemployment options for those that lost their jobs. All unemployment benefits are considered taxable income for 2020, but whether they are taxed will depend entirely on the type of program. Make sure to check with your unemployment benefits provider to determine whether or not you will need to pay taxes on your unemployment.
COVID-19 Impact #5: Tax Benefits for Business Owners
Business owners received two main benefits through the CARES Act, the Credit for Sick and Family Leave and the Employee Retention Credit. When filing taxes at the end of the year, consider whether the year’s changes allow you to benefit from other tax breaks beyond the CARES Act.
For example, many small business owners may have been forced to close down their physical location, opting for more remote work. Depending on the circumstances, these business owners may be able to claim their home as a home office, gaining a home office deduction on their 2020 taxes. Similarly, consider whether the changes created by 2020 make you eligible for other deductions and tax changes.
These new provisions helped a lot of people during 2020, but don’t create more financial harm for yourself by incorrectly filing your taxes this year. With all of these new options to think about, utilizing the help of a professional this year is more important than ever. If you need guidance on tax issues for 2020, we would be happy to speak with you and point you in the right direction. Click here to schedule an initial call with our team. There is no cost or obligation!