Taxes in the Era of Corona
February 25, 2021 Author: Tess Downing, MBA, CFP®, Complete View Financial
As if coronavirus weren’t adding enough stress, now you have to wonder if you’ve addressed all the changes it has made to your 2020 tax filing. Your tax situation is unique, so only a tax professional can tell you if you have covered all the possibilities of paying no more than you are required to pay.
Meanwhile, let’s look at the more important things – from stimulus payments to unemployment income to RMDs – that you need to consider.
What is the timeline for filing?
Last year, when you were filing for 2019, the IRS delayed the filing deadline from April 15 to July 1.
That’s not the case this year. This year the IRS started accepting federal returns on February 12 – a little later than usual because it was busy sending out stimulus checks – but it is sticking to the traditional April 15 deadline to file and pay your federal income taxes. (*There are recent changes to certain states due to natural disaster areas.)
You’ll face late payment penalties if you miss the deadline, so you should file for an extension by April 15 if you need more time. That will give you six extra months to file, but you still have to pay any taxes owed by April 15 to avoid penalties.
If you can’t pay the entire tax bill by April 15, you should pay what you can by that deadline. That will lessen the penalties and interest, which can add up quickly.
Don’t hide from the IRS; communicate instead. Several options exist: short-term extensions, payment plans, “offers in compromise” or requests to temporarily delay the collection process until your situation improves. The IRS may waive some penalties, but not the interest charges on the unpaid portion.
Are stimulus payments taxable?
The stimulus payments are not taxable. That’s because the IRS sees those payments as a tax credit, which it calls a “recovery rebate credit.”. It merely paid you an advance on that tax credit, and when you file your taxes, the debit and the credit cancel each other out.
If you’d like more reassurance, this year’s instructions for Form 1040 should provide it. The IRS calls stimulus payments “economic impact payments.” It says, “Any economic impact payments you received are not taxable for federal income tax purposes, but they reduce your recovery rebate credit.”
So, if you got what was due you, you and the IRS are even.
But if you didn’t receive what you were due, you still have recourse. You can claim it on your 2020 tax filing.
Your 2018 or 2019 income was used to calculate the original stimulus checks that were sent out. Maybe it was too high, and you didn’t get a check.
But if your 2020 fell enough to merit more stimulus money, again, you have recourse. You may be able to “back claim” the money this year when you file your 2020 federal return. Check with your tax preparer on how to do this.
If the amount owed to you is greater than the taxes you owe on 2020 earnings, you will receive it as a refund.
Are unemployment benefits taxable?
Many Americans found themselves on unemployment in 2020 for the first time in their lives. If that’s your case, you may be wondering if that income is taxable.
Yes, it is, both by the IRS and possibly by the state where you live. All but 15 states tax unemployment compensation. Those states are AL, AK, CA, FL, MT, NV, NH, NJ, PA, SD, TN, TX, VA, WA and WY.
Your taxable earnings would include the $600 extra per week if you benefitted from the Federal Pandemic Unemployment Compensation program that came with the Coronavirus Aid, Relief and Economic Security Act, or CARES Act.
You should receive Form 1099-G (Certain Government Payments) that shows how much you were paid in Box 1 and how much federal income tax was withheld in Box 4. (If your earnings are taxable at the state level, you’ll have to check with your state on your earnings and withholdings.)
If you didn’t have taxes withheld from your payments, you would likely owe something when you file for 2020. If so, that amount could be reduced if the IRS still owes you something from the stimulus payments.
Is work-from-home income taxable?
Unless what you earned by working from home was salaried work paid by your employer, any income from on-demand work, services or goods will be considered self-employment. Work you do as an independent contractor is taxable. If your net earnings exceed $400, you have to file a tax return.
It’s important to have kept good records of your income and your expenses during the year. As an independent contractor, you will be filing more than just Form 1040.
Depending on your earnings, you may be required to make estimated tax payments during the year towards the taxes due on your income.
Even if you don’t receive 1099 forms from your clients or customers, you have to report all income on your tax filing. It doesn’t matter if you have a job and the extra earnings come from a side job or something temporary.
Are there other tax credits you should know about?
Congress passed several changes to tax benefits to soften the impact of coronavirus. Because of changes in income or certain life events, some tax credits may apply to you and lead to a refund even if you owe no taxes.
These tax credits include the Earned Income Tax Credit (EITC), Additional Child Tax Credit (ACTC), Child Tax Credit, Child and Dependent Care Credit, Credit for Other Dependents and education tax credits or deductions, among others.
Be sure to check with your tax professional to see if you qualify for any of them.
What about charitable contributions?
Usually, if you take the standard deduction when preparing your tax filing, you can’t deduct charitable contributions. But Congress was looking for a way to motivate people to make contributions to those in need. So, for 2020, the CARES Act allows you to take a deduction of up to $300 for cash contributions made to qualifying charities before December 31, 2020.
While not a large amount, it does lower both your adjusted gross income and your taxable income.
Is there anything special about RMDs and 2020 taxes?
In early 2020, Congress used the CARES Act to waive the need to take required minimum distributions (RMDs) from IRAs and retirement plans that year. It included beneficiaries with inherited accounts.
If you hadn’t already taken any such distributions in 2020 up until then, you could skip doing so (if you didn’t need the funds), and you would owe no taxes for them. Typically, you would be taxed on the amount taken as an RMD and taxed much higher on any shortfall you failed to take.
If, on the other hand, you had already taken part or all of your 2020 RMD, you had the option of returning the funds to the IRA or other qualified plan.
RMDs taken unnecessarily were considered eligible for rollover into another IRA or qualified retirement plan or back into the original plan. To avoid paying taxes on the distribution, you had to repay the distribution one way or another before August 31, 2020.
What about IRAs and 2020 taxes?
Thanks to the 2019 SECURE Act, as of 2020, there is no longer an age limit for you to contribute to traditional or Roth IRAs, as long as you have at least that amount of earned income. You can deduct contributions to an IRA up to the $6,000 limitation ($7,000 if you’re age 50 or older).
In fact, if you’re eligible, you can make such contributions up until April 15, 2021, and still qualify for the deduction on your 2020 tax return.
The CARES Act also allowed taxpayers to take coronavirus-related early distributions from IRAs and 401(k) plans. Up to $100,000 of the distribution was not subject to the 10% penalty usually incurred for taking a distribution before turning age 59½.
You could settle any tax implications in one of two ways. Divide the distribution amount into three equal parts and include one part in your income each year for three years. Or repay the distribution to an IRA or plan within three years and get some taxes back.
And, lastly, refunds?
The fastest and most accurate way to file your return and get your refund is to file electronically and ask for a direct deposit of your refund.
The IRS has a tool called “Where’s My Refund” at the IRS.gov website that you can query 24 hours after the IRS has acknowledged receipt of your electronically filed return.
While this isn’t an exhaustive list of all the changes brought on by coronavirus, it gives you a starting point to decide if you can handle your taxes on your own or if you need to call on a tax professional.
If you feel 2020 has had any impact on your overall financial plans and Complete View Financial can help, do call us for an initial consultation.