How COVID-19 May Change Your Taxes for 2020
Because COVID-19 disrupted life in many ways, the reverberations could result in changes in your taxes for 2020, some that might be welcome and others not so much. What if you received unemployment benefits or stimulus money, or moved to another state because of the pandemic? For sure there are plenty of questions. Here are some things you may need to know to answer some of them.
What If You Moved to a New State?
There’s a good chance you moved during the pandemic. According to Pew Research , about one-in-five US adults said they either changed their residence due to the pandemic or know someone who did. If you moved out of state, permanently or temporarily, that could have tax implications.
For example, you may need to file taxes in multiple states. The rules vary from state to state so it’s best to check the regulations in both states. Talking to your tax preparer is recommended to get information for your particular situation.
Employee vs Independent Contractor
Those working from home since the pandemic might be wondering what deductions they may be eligible to take. In general, however, employees who receive a W-2 from their employer are limited in itemizing most deductions for miscellaneous job-related expenses, including unreimbursed employee business expenses, since those were eliminated under the Tax Cuts and Jobs Act passed in 2017. Checking with a tax professional is the best way to see how an individual’s financial situation has been affected by this legislation.
While many people won’t be able to take advantage of deductions because they are employees, self-employed individuals or independent contractors who receive a 1099 for the work they perform and file a Schedule C with their income taxes may be able to deduct business expenses from their business income. For example, the home office deduction may be taken if the home office is the principal place of business and it is regularly and exclusively used to conduct business, among other requirements. If you still have questions about this, it’s best to check with a tax professional.
Relief for Early Withdrawal From Retirement Funds
Some people may have had to dip into their retirement funds to survive 2020. Fortunately, there may be some breathing room for qualified individuals who did. The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) provides special distribution options and rollover rules for retirement plans and IRAs and expands permissible loans from certain retirement plans.
For example, the CARES Act waived the 10% penalty for early withdrawal from retirement accounts (for those who are under age 59 ½) in 2020 for those affected by COVID-19 for up to $100,000 in distributions. However, regular income tax would still be assessed on the distribution, though the CARES Act allows you to spread those payments over three years. Those wanting to recontribute the early distribution also have three years in which to do so, and those funds do not count toward annual contribution limits. These and other questions are answered on the IRS website.
Stimulus Payment is a Gift
Qualified individuals who received a stimulus payment from the federal government can consider it a gift from Uncle Sam—one that won’t come back to bite them at tax time. The payment is not income and will not be subject to income tax. Neither will it affect tax refunds or increase any possible amount owed on a 2020 federal income tax return.
Unemployment Benefits Are Taxable
The $600 a week increase in unemployment benefits that was part of the CARES Act was a boon for recipients, but it was no free lunch. Unemployment benefits are subject to federal income tax. The IRS recommends having taxes withheld from unemployment compensation or setting some money aside to pay the tax tab.
Unemployment benefit recipients will receive a Form 1099-G in January 2021 that will show how much unemployment compensation was received and any federal income tax that was withheld. Most states also tax unemployment benefits, but checking with the local unemployment office is a good place to start if you’re unsure about your state’s policy.
What About the 529 Plan Money That Was Returned to Me?
When colleges and universities shut down in-person classes and students had to move out of dorms, some institutions refunded a portion of tuition and room and board. If you received a refund of these fees, that money could be taxable and subject to a penalty if it is no longer being used to pay for qualified education expenses.
Putting the funds back into the 529 plan within 60 days from the date of the refund is the recommended way to handle this type of refund. It’s also a good idea to keep proof of the date of the refund and when you put the funds back into the 529 plan, in case the IRS asks for proof to show that your transaction wasn’t a taxable withdrawal.
Getting Rewarded for Your Good Deed
The CARES Act allows for the deduction of up to $300 of qualified charitable contributions as an “above-the-line” deduction—an adjustment in determining adjusted gross income—for the 2020 tax year even for those who do not itemize. Before the Act, only those who itemized deductions could take advantage of this. Charitable deductions under the CARES Act must be in cash, checks, or credit card payments and given to a qualifying charity.
The CARES Act also increased the percentage of a taxpayer’s adjusted gross income (AGI) that can be contributed to charity if they itemize deductions. Previously, the deduction for cash contributions to charities was capped at 60% of a taxpayer’s AGI. The CARES Act raised that limit to 100% of AGI for 2020. To qualify, the contributions must be made directly to charitable organizations.
Skipping Your Required Minimum Distribution
The CARES Act waived the requirement for required minimum distributions (RMDs) from retirement accounts which are, in most cases, taxable. For those who did not need to take the RMD, there could be tax advantages, including not owing tax on the RMD. It also may reduce the risk of the RMD boosting the taxpayer into a higher tax bracket.
Taxes may be tricky for 2020 with all that’s happened. Think about how your life changed. Did you move to a new state, lose your job, start working remotely for an employer in a state that’s different from where you live? These are just some of the factors that could change your taxes in 2020. This is likely a time to get professional help with your tax return to make sure you don’t make any costly mistakes.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
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