I like to think that I am really good at doing my own taxes every year. I have had a few decades to perfect my skills, so I’d say I am pretty experienced at doing it and I actually look forward to it, believe it or not. But this year for our 2020 taxes, it may be a bit more of a challenge for me and for you.
A few weeks ago I wrote about some of the tax changes for 2020. But there’s more you need to know about the changes that have been made. Why? It’s mainly because of the pandemic and how that has affected everything and that includes your tax picture.
What You Need to Know About Your 2020 Taxes
Your return may be a little different and perhaps a bit trickier than in years past. Here are several more things taxpayers should understand before filling out a 2020 1040 tax form.
Unemployment and your taxes
Unemployment benefits broke records in 2020 and were a lifeline for many who lost their jobs during the pandemic. Unfortunately, those jobless benefits are taxable.
When you signed up for unemployment benefits, you had the option to have taxes withheld. Whether you did or not, you’ll receive a Form 1099-G, “Certain Government Payments”, which will show the amount of unemployment benefits you received in 2020 and how much, if anything, was withheld for taxes. Any severance pay you received if you permanently lost your job last year is also taxable.
There is some good news depending on your 2020 income and the number of dependents you have. You may be eligible for the Earned Income Tax Credit (EITC), which could reduce your taxes owed, dollar for dollar, by as much as $6,660.
The EITC is a refundable credit, which means that you’ll get the full amount of the credit you’re eligible for, even if you had no income. It will still result in a refund.
The pandemic delayed the start of the tax season until February 12th, but that’s not the only date that changed. If you are a procrastinator, you may be in luck this year. A taxpayer can get an automatic filing extension to October 15th by submitting Form 4868, “Application for Automatic Extension of Time to File U.S. Individual Income Tax Return”, later than the usual extension deadline. However, you still must pay the amount of tax you owe by April 15th or face interest and penalties.*
*Soldiers in combat zones and people living in disaster areas typically get an extension on both filing and paying federal income taxes.
If you didn’t get a stimulus check last year or if you didn’t get as much as you were entitled to, you can still claim the missing stimulus money on your 2020 tax return in the form of a tax credit called the Recovery Rebate Credit. (The stimulus payments were, technically, an advance on this tax credit.)
A tax credit reduces your taxes, dollar for dollar. And in this case, it can not only reduce your taxes to zero, but actually produce a fully refundable tax credit. Use the Recovery Rebate Credit Worksheet that comes with your federal tax return to figure how much of a credit, if any, you’re eligible for. The 21-line worksheet looks intimidating, but it’s worth the effort if you’re missing money. No itemization is required. The amount from the worksheet goes on line 30 of your 1040 form.
Are the stimulus checks taxable? According to the IRS, stimulus payments are not considered income and no tax is owed on the money. Stimulus payments are also not considered income for purposes of determining eligibility for federal benefits or any assistance programs.
Standard deduction changes
In order to itemize deductions, you need to have more in deductions than the standard deduction, which everyone gets. For the 2020 tax year, the standard deduction is $12,400 for individuals and $24,800 for married couples filing jointly, which is up from the $12,200 for individuals and $24,400 for married couples in 2019. It’s $18,650 for heads of households, which is up $300 from 2019.
If you rented your home or didn’t have a pile of other deductions, your standard deduction is probably more than you would get by itemizing. And taking the standard deduction means you don’t have to keep a box full of receipts all year long too.
Seniors 65+ receive an even bigger deduction
The standard deduction for 2020 gets even better for age 65+ taxpayers. Married taxpayers born before January 2, 1956, whether filing jointly or separately, get an extra $1,300 a piece added to their standard deductions. The additional standard deduction is $1,650 for singles and heads of households. You are also eligible for the same additional standard deduction amounts if you are blind and younger than 65. If you are over 65 and blind, the amounts double.
Calculating the bigger standard deduction is made easier with Form 1040-SR, “U.S. Tax Return for Seniors”. This special tax return for those 65 and older includes a simple-to-use standard deduction chart at the bottom of the form that shows the amount of the bigger standard deduction based on your filing status and how many boxes you check for age and blindness.
One more plus is the larger print that seniors may need on the form to help fill it out.
You need two things to deduct your medical expenses. First, all of your itemized deductions, including eligible medical deductions, need to add up to more than the standard deduction. Second, you can deduct only medical expenses that are above a specified threshold of your adjusted gross income (AGI).
The good news is that the temporary current threshold of 7.5%, which was scheduled to return to 10% in 2021, has now been made permanent, thanks to the pandemic. The permanent 7.5% threshold was included in stimulus-related legislation signed into law on December 27th.
A large number of unreimbursed expenses are eligible for the medical deduction in order to help get you above the 7.5% threshold aside from the usual out-of-pocket fees you pay to doctors and dentists. You can deduct the costs of nursing home care, for example, provided that medical services are the main reason for being in the nursing home. You can also deduct acupuncture sessions, smoking cessation programs, false teeth, and some insurance premiums.
Charitable deduction changes
If you miss taking the deduction for charitable giving because you can’t overcome the bigger standard deductions that were implemented in 2018 by the tax reforms, you’re not alone. The charitable deduction was an incentive that helped funnel a great deal of money into charities.
To ease that, Congress allowed anyone who takes the standard deduction to deduct up to $300 in cash which includes currency, checks, credit or debit cards, and electronic fund transfers donations made to charities in 2020 directly on their 1040 with no itemizing required. The $300 maximum is per “tax unit”, which means you can only deduct $300, no matter whether you’re filing a joint return or a single return. But it will get even better in the 2021 tax year, when those filing jointly can get a maximum deduction of $600, $300 per spouse.
Social Security payroll taxes
The IRS issued guidance last year that gave employers the option to defer collection of employees’ portions of Social Security payroll taxes between September 1st and December 31st, 2020. The idea was to give workers more in their paychecks during that four-month stretch in order to help ease the impact of the COVID-19 crisis.
Employees originally were required to repay the deferred taxes this year by April 30th, either in a lump sum or incrementally through increased paycheck withholdings. You’ll still have to repay any payroll taxes deferred in 2020, but Congress has given you more time to do so.
Under stimulus-related legislation signed into law on December 27th, you’ll now have until the end of 2021 to repay the deferred Social Security payroll taxes before penalties and interest start to accrue.
As a reminder, the Social Security payroll tax is 12.4%, with the employee paying 6.2% and the employer paying 6.2%. Self-employed workers pay the full 12.4% themselves. In 2020, you paid Social Security tax on income up to $137,700, an increase from the $132,900 income cap in 2019.
You can’t run and hide from your tax obligations no matter how hard you try. You can get and use every legal way to limit your tax liability and that is something everyone should do and never feel any guilt about doing so when you do it. But if you get sloppy or lazy and the IRS finds you, know that you will have penalties to pay.
If you’re required to file a federal tax return but don’t, you’ll pay. If you file after April 15th without having asked for an extension, you’ll have to pay a late filing fee of 5% of the taxes you owe for each month or part of a month that a tax return is late. That penalty starts accruing the day after the tax filing due date and can build up to a maximum of 25% of your unpaid taxes.
The IRS also levies a late payment penalty, which is 0.5% of your unpaid taxes each month (that’s 6% annually). The maximum monthly penalty is 5% of your unpaid taxes. Unlike the late filing penalty, the late payment fee keeps accruing until you pay your taxes. Don’t let any of that happen to you!
You can pay your taxes by credit card if you don’t have the money you owe on hand. But be warned that you’ll be charged a processing fee. You can also ask the IRS for a payment plan via this online tool.
Are you ready to file yet? Are you getting a refund? If you are, make sure it isn’t because you had too much withheld from your paycheck and if so, make sure you adjust your W-4 form now so it never happens again! Don’t give Uncle Sam an interest free loan…he doesn’t give one to you, does he?