Like everything else in 2020, your 2020 income taxes will be like doing taxes in no other year. It’s now the time of year to start thinking about taxes, but so far not a lot of real info is out there for you to prepare. But one thing is for sure, the upcoming filing season is going to be a bit trickier for many Americans due to the rampant unemployment, working from home, and general upheaval due to the COVID-19 virus.
So strap yourself in and get ready. Here are just a few of the pandemic-specific conditions, good and bad, to be aware of as you get ready for 2020 income taxes.
Differences in 2020 Income Taxes
Did you know that unemployment benefits are taxable income? This fact may be a huge surprise for some filers. If you have never been unemployed before, how would you know?
Workers were given a break and were not required to have federal taxes withheld from their benefit payments. This gave them more cash in their hands to deal with rent, food, and all the complications of the virus. Everyone getting an unemployment check was given the option to have the tax withheld, but most people did not.
It’s worth noting that unemployment benefits are all subject to federal taxes, but not all states tax it. You will need to check with your state to find out if you need to report and pay any income taxes locally which are separate from the federal income taxes.
There are serious penalties for those taxpayers who—even if unintentionally—do not include unemployment income on their taxes. They could face a tax bill, penalties, and/or interest charged by the IRS.
The Good News About the Loss of Income
The drop in your income because of job loss could mean some households are eligible for deductions and credits that they did not qualify for in the past. This could include the earned income tax credit and child and dependent care credit. In some cases, it may mean hundreds or even thousands of dollars you can get when your taxes are processed in early 2021. The sizes of some of these credits may also change based on your income. Do not miss out on any of these special deductions and/or credits!
Stimulus Relief Checks
As part of the CARES Act—a relief package passed early in the pandemic—millions of Americans were given payments of $1,200 per adult and $500 per child. At last count, the IRS said 160 million payments totaling about $270 billion have been delivered by direct deposit, paper check, or prepaid debit card. You probably got some of this money, and the good news is that this “relief” is not taxable.
However, what many people do not realize is that the money they received is actually an advanced payment on the Recovery Rebate Credit for 2020 tax filers. As such, people who did not receive their payment, or only got a partial payment, can resolve this issue on their 2020 taxes when they file. If you were overpaid, you will not owe.
And very important to know is this fact: If you did not get a relief check because your income was too high, but it has since fallen in 2020 and made you eligible, you also can get the payment via this credit.
With the need so great, the government made changes for 2020 to encourage those who could to give more to help others in need. One bright spot is the new, temporary deduction for charitable donations.
As part of the CARES Act, for 2020, taxpayers can deduct up to $300 for cash donations given to charity even if they choose to take the standard deduction, rather than itemizing their deductions. The Joint Committee on Taxation estimates that about nine in ten (90%) taxpayers now take the standard deduction since the changes in the tax laws two years ago.
So if someone makes a cash donation before the end of the year, they can get a deduction of up to $300 when they file. A deduction lowers your adjusted gross income and your taxable income which saves you from paying more tax.
Working from Home
Working from home has been increasing slowly over time, but in 2020 it became the norm and it may become that permanently soon for lots of Americans.
But even though they did work from home this year, many people won’t be able to claim expenses for their new work-from-home setup.
Why not? The home-office deduction can only be taken by businesses or the self-employed. The tax law enacted in late 2017 did away with the ability of employees to claim any unreimbursed employee expenses, at least until 2025. However, check in your local state because some states may allow people to deduct unreimbursed employee expenses.
If you can claim this expense, the home office must be used “exclusively and regularly as your principal place of business”. That means the table where your kids do homework or the family eats dinner does not count.
Relocation Because of Your Job
Another big issue is for those who relocated or moved during the pandemic, which could complicate where you need to report and pay state taxes.
If you moved, you may need to file taxes in multiple states. The rules vary by state, but it is critical that you check your new state’s tax resources for more details. It’s likely that you will have two part-year state returns to file: one for the old state and one for the new.
If you are hoping to lower the tax burden by claiming residence in the state with a lower tax rate, be careful. States can be aggressive about auditing taxpayers who claim they’re no longer residents. Requirements vary by state, but they’re looking to see if taxpayers gave up most of their ties to the old state and have closer ties to the new state. That includes things like still owning or leasing a residence, where you are registered to vote, or the state of your driver’s license that you are using.
The IRS has yet to announce when the tax filing season will open. Typically it begins in early January. As of today, operations have gone very slowly even though the IRS has brought some of its employees to the office. But its face-to-face operations with taxpayers will remain extremely limited for right now. The IRS continues to urge taxpayers to file their taxes online and use other online tools whenever possible.
You can expect that in a few weeks, guidelines, dates, and forms will begin to roll out for the 2020 tax season.
Some of us will be looking at tax season with a chance to get more credits and deductions than ever before to offset the loss of income in 2020. That’s a real switch for many. But no matter what your tax situation has been or will be, always be prepared and keep accurate records so you can file promptly and get your refund accurately.
This year, it might have been totally impossible to file as I always say, so that you get nothing and owe nothing at tax time. None of us could have known what a pandemic would mean to our taxes and our incomes.
2021 gives you a new chance to get back on track to controlling your finances, so get to it!
Have you started to prepare your 2020 tax plan? How are you coping with your job and the pandemic? Were you unemployed for a time in 2020 and have returned to any kind of normalcy as of yet?