It’s that time of year again! Tax filing season officially began on February 12th, and with no federal intervention for the tax deadline on the horizon, we have 2 months to get our financial affairs for 2020 in order. Tax season may look a little different for some of us this year, because no one could have predicted the changes and challenges we would all face in 2020, and the impact these challenges would have on all aspects of our lives. From the move to working and learning from home to job losses and in some cases illness, the ongoing COVID pandemic has had a profound impact on everything, including our finances.
As you prepare to file your 2020 taxes, there are a few things you need to keep in mind, such as coronavirus-related legislation and medical deductions. Additionally, many changes to how you will file your taxes were already planned for tax year 2020, even before the pandemic took hold. We’ve gathered information on several of the 2020 tax year changes and special Coronavirus related differences for filing this year.
Stimulus Payments
You might be wondering if those stimulus payments you received last year are going to come back to bite you on your taxes. During the first round of payments, individuals received $1,200 (or $2,400 for couples), plus $500 for each child under age 17. In December a second-round of stimulus checks were released, though not everyone received theirs in calendar year 2020. This second stimulus payment was for $600 per person (or again, $1,200 for married couples filing jointly), plus an extra $600 for each child under 17. These payments began phasing out for joint incomes over $150,000, at $112,500 for head-of-household filers and at $75,000 for individual filers.
Regardless of the amount you received, these payments are officially known as “Recovery Rebates,” and they were an advance payment of a special 2020 tax credit known as the recovery rebate credit. The good news is, this money will not add to your taxable income for 2020. For this you can thank the provisions of the CARES (Coronavirus Aid, Relief, and Economic Security) Act, which state that these funds will have no “clawback” mechanism by which the government can reclaim the funds.
That doesn’t mean your work is done when it comes to your taxes though. When you file your 2020 return, you’ll have to reconcile the stimulus checks you received with the recovery rebate credit you’re entitled to claim. For most people, the combined total of your stimulus check payments will equal the tax credit allowed. If this is the case, no further work is needed on your part, and your credit will be reduced to zero. If on the other hand your stimulus checks equaled less than your credit amount, the tax you owe will be reduced by the difference, which might even net you a small refund. And finally, if the combined total of your stimulus checks was more than your credit amount, don’t worry – you won’t have to repay the difference to the IRS.
Paycheck Protection Program Loans
Another aspect of the CARES Act was the Paycheck Protection Program, or PPP. These loans were an effort to to help struggling small business owners keep their businesses open despite being affected negatively by Coronavirus and accompanying quarantines. If recipients used the funds for certain business expenses such as payroll, rent or interest on mortgage payments, and utilities, the loans were intended to be forgiven. Additionally, any eligible expenses paid with money from those PPP loans can be deducted from your taxable income. If you received one of these loans, make sure to have your loan forgiveness application approved by the Small Business Administration or else you could be responsible for repayment of the amount borrowed.
Unemployment Benefits
Many Americans found themselves at least temporarily out of work due to the Coronavirus pandemic, as many industries found it difficult or impossible to conduct business in a remote manner. So, many people received unemployment benefits who might not have done so in the past, and may not know how to handle these payments when it comes time to file their taxes. To answer the most common question asked about unemployment payments, yes, unfortunately you do need to pay income taxes on the money you received. If you you elected not to have taxes withheld on the payments when you registered for benefits, you should either be making quarterly estimated tax payments, or you should set aside enough money to pay the taxes owed in full on April 15th.
Educational Savings Accounts and 529 Plans
If you have an Educational Savings Account (frequently abbreviated as ESA) or 529 account, you probably know that any money you take out must be used for educational expenses or else you will pay income taxes on the money along with a withdrawal fee. If your school or college went remote this year, they may have refunded some of your money, and if that money came out of an ESA or 529 account, it must be put back into the account or used on other educational expenses in order to remain tax-free.
There have also been some changes in 2020 affecting how you can use these funds, aside form the Coronavirus related issues. You can now use your 529 plan to pay for the costs associated with certain apprenticeship programs, including fees, books and supplies. Also, you can now use this money to pay for up to $10,000 in student loan debt without having to pay taxes on the amount or a withdrawal penalty.
Another aspect of the CARES Act is meant to help with educational expenses. Employers are now allowed to pay down up to $5,250 of their workers’ student loans. These assistance payments are excluded from federal taxable wages and can be used to pay down student debt or to assist with current education expenses such as tuition, books and fees.
COVID-Related Business Expenses
Only a small fraction of people will be able to take advantage of this next deduction, but I think we can all be pleased to know it’s available. For 2020, teachers and other educators can deduct unreimbursed expenses up to $250 for PPE, or personal protective equipment they are using to stop the spread of COVID in their classrooms. The deduction is only to be used for items purchased out-of-pocket that were not reimbursed by the school or district. The amount that can be deducted increases to $500 for married couples filing jointly when both parties are educators. Eligible parties include teachers, counselors, instructors, principals and aides working in grades K-12 for at least 900 hours in 2020.
Retirement Plans
Some changes were already in the works for retirement plans prior to the Coronavirus pandemic, courtesy of the SECURE (Setting Every Community Up for Retirement Enhancement) Act of late 2019. In 2020 the CARES Act included additional changes, mainly regarding Required Minimum Distributions, or RMDs. Under the SECURE Act, the beginning age for taking RMDs has risen from 70 1/2 to 72, but thanks to the CARES Act, seniors can skip their RMDs in 2020 without facing penalty.
There are still more changes for the 2020 tax year, such as that allowing for owners of traditional IRAs to make contributions past the age of 70½. Also, anyone who has a baby or adopts a child can take a payout from their IRA or 401(k)s of up to $5,000 without having to pay the usual 10% fine for withdrawals taken before the age of 59 1/2. Further, if you are making a withdrawal for coronavirus related reasons, you will be able to withdraw up to $100,000 without facing a penalty. Already have such a loan? You can now delay payments for up to one year, though interest will accrue.
Tax Brackets and Standard Deductions
Your tax rate, or the percentage of your income that you owe the government in the form of taxes, is based on your tax bracket, and that is determined by the amount of money you make and on whether you file jointly or separately. The tax brackets for 2020’s taxes have changed slightly – the tax rates are the same but the amounts in each bracket have been altered slightly due to inflation. You can find an updated chart of income tax brackets for 2020 here.
When you file your taxes, you can choose to take the standard deduction, or you may itemize your deductions one-by-one. Many people see this as a hassle, but others feel it is worth the time if the total of their deductions exceeds the standard. For 2020, the standard deductions for each filing method have changed slightly, increasing for inflation just like the tax brackets have. If you are filing single, the standard deduction is now $12,400, and it is $18,650 for those filing as head of household. If you are married, your standard deduction is $24,800 if filing jointly and $12,400 if filing separately.
Other Deductions
Each deduction you claim helps to lower your tax amount owed to the federal government. Some deductions can only be used if you are itemizing, while others can be used even if you are taking the standard deduction. Some of these available deductions have changed for the 2020 tax filing season. In an effort to promote charitable giving during the pandemic, the CARES Act allows you to deduct up to 100% of your adjusted gross income in qualified charitable donations, if you are itemizing. This amount was formerly capped at 60% of your AGI. If you are not itemizing, the CARES Act still helps you out this year by adding a new deduction that allows you to write off up to $300 in charitable contributions that were made in cash.
Medical deductions have also been changed somewhat, in an effort to help those who have spent time either in the hospital or battling serious illnesses this year. You can now deduct any medical expense above 7.5% of your adjusted gross income, that is your income minus all other deductions. Again, you do have to itemize your deductions in order to write off these expenses.
Many people may have questions about their business expenses if they have recently begun working from home. If you’re self-employed, there are several deductions you can claim on your tax return, such as travel expenses and the costs associated with your home office. However, these deductions do not apply to those of us who were sent home to work remotely but remained employed in our same positions. The home office deductions are unfortunately reserved for the self-employed only.