2020 was a year full of unpredictable circumstances because of COVID-19 that have touched just about everyone’s lives (and taxes) in one way or another. Whether you were unemployed or commissioned to work from home, you may have experienced things that impacted your finances and have tax implications. Despite being possibly negatively impacted by events that occurred in 2020, you may see some tax benefits under the CARES Act or the recently passed Coronavirus Response and Relief Supplemental Appropriations Act. You may also be eligible for existing tax credits and deductions that you weren’t eligible for before that could help your tax refund.
With tax season in full swing, here are some key highlights of 2020 events that may have tax implications and how you can save money on your taxes.
Over 40 million Americans were unemployed and filed for unemployment benefits in 2020. To help provide relief to those that were laid off or furloughed, the Coronavirus Aid, Relief and Economic Security Act (CARES) and the Coronavirus Response and Relief Supplemental Appropriations Act provided unemployment benefits and expanded eligibility to self-employed individuals.
One of the top questions we are hearing this tax season is, “Is unemployment income taxable?” The answer is yes, but don’t worry if you received unemployment and didn’t have taxes withheld. You may be eligible for income-based tax credits like the Savers Credit, worth up to $1,000 for single filing and $2,000 married filing jointly. You may also be eligible for more of the Child and Dependent Care Credit that you weren’t eligible for before due to higher income.
If you were unemployed and ended up working in 2020, you may also be eligible for the Earned Income Tax Credit worth up to $6,660 for a family with three kids when you may not have been eligible before.
In general, taxpayers that were unemployed and claimed the Earned Income Tax Credit before may see a lower credit due to lower income this year, however the second coronavirus relief package has a special lookback provision. It allows you to use your earned income from 2019 to determine your 2020 Earned Income Tax Credit since your higher 2019 income may help you receive a higher credit.
Stimulus Payments and the Recovery Rebate Credit
Both the Coronavirus Aid, Relief and Economic Security Act (CARES) and the Coronavirus Response and Relief Supplemental Appropriations Act delivered relief through a range of measures, including an advanced tax rebate also known as an advanced stimulus payment to taxpayers.
Depending on your filing status, your adjusted gross income in 2018 or 2019, and the number of dependents you have, you may have received the full amount of the first stimulus payment in 2020 ($1,200 single, $2,400 married filing jointly) plus $500 for each qualifying child. You may also have received the full amount of the second stimulus payment ($600 single, $1,200 married filing jointly) plus $600 for each qualifying child. If that is the case, you do not need to complete any information on dependents on your 2020 taxes.
One thing you need to know is that stimulus payments are not taxable income. If you didn’t receive a full stimulus payment, then you may be able to claim more stimulus in the form of a Recovery Rebate Credit when you file your taxes. This also means you may be able to increase your tax refund or lower what you owe.
If you received too much stimulus based on your 2020 income you don’t have to pay it back.
If you had a baby in 2020, you can claim the additional stimulus payment for your qualifying child in the form of a recovery rebate when you file your 2020 taxes. The IRS used your latest tax filing to issue stimulus payments and did not know about your baby when they issued your stimulus payments.
College students who file a tax return may also be able to get stimulus in the form of a Recovery Rebate Credit as long as they are not claimed on their parents’ tax return.
Expanded Charitable Contribution Deduction
Another provision under CARES Act expanded the ability for more taxpayers to deduct charitable contributions. Typically, if you make a charitable donation to a qualified charity, you can deduct the contribution if you are choosing to itemize your deductions instead of claiming the standard deductions. However, under the CARES Act, you may be able to take a new charitable contribution on your 2020 taxes for your cash donations made to a 501(c)(3) organization up to $300 even if you don’t itemize your deductions. This will be something for taxpayers to keep in mind since close to 90% of taxpayers now claim the standard deduction instead of itemizing and are no longer able to deduct charitable contributions under tax reform.
Special Tax Treatment for Retirement Withdrawals
The CARES Act also provides more relief if you took out a coronavirus related distribution from your retirement account of up to $100,000. The relief waives the 10% penalty on early withdrawal if you are under 59-1/2 and allows the distributions to be included in income over three years instead of all being included in 2020.
New Credits for Self-Employed
The Families First Coronavirus Response Act (FFCRA) passed in March, includes relief for self-employed individuals and small businesses in the form of refundable sick and family leave tax credits. If you are self-employed and could not work because you were impacted by an isolation order, had to self-quarantine, experienced symptoms of COVID-19, took care of a family member that was sick, or could not run your business because you had to take care of your child whose day care was closed, you may be eligible for the new qualified sick and family leave tax credits that can be worth thousands of dollars.
Working From Home
If you were among the many that had to work from home as a result of COVID-19 you may be wondering if your work from home expenses are tax-deductible. Under tax reform, in general only those self-employed can take the home office deduction and deductions for home expenses.
If you are self-employed you can take the home office deduction which allows you to take a deduction for a portion of your home expenses like rent, mortgage interest, property taxes, and utilities based on the percentage of space used for your office.
To find out more about tax implications from 2020 and the tax relief available, check out TurboTax Self-Employed Coronavirus Relief Center or the Unemployment Center. Staples has a variety of TurboTax Software that can help you file with ease in the comfort of your home this season. TurboTax Desktop coaches you along the way, so you can get your taxes done right and receive your maximum refund. New this year, you can connect live via a one way video with our TurboTax LIVE @ Staples tax experts, who have an average of 12 years-experience, to get your tax questions answered and have your taxes reviewed and filed for you. Two ways to do your taxes. Both with total confidence.
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