Filing Your Taxes Soon? Learn 5 Ways COVID-19 Will Likely Impact Your 2020 Tax Return. Here’s How
5 Ways COVID-19 Will Likely Impact Your 2020 Tax Return
The CARES Act, a direct response to the economic turmoil caused by COVID-19, sought to provide economic support to millions of Americans. This support extended to the way taxes are filed and processed for 2020, creating additional benefits depending on your circumstances. Read on to learn five ways the events that took place in 2020 could affect your taxes. Consult with your tax advisor or retirement advisor before acting upon any information.
Impact #1: Stimulus Checks & Tax Credits
Millions of Americans received stimulus checks during 2020 and early 2021 - the first for $1,200 and the second for $600. These stimulus checks were also referred to as Economic Impact Payments or Recovery Rebate Credit. According to the IRS, if you did not receive these payments (and were eligible to do so) then you may be able to deduct them from your 2020 taxes.1 There are a few requirements you must meet before filing for this reduction.
- Be a U.S. citizen or resident alien during 2020
- Must not be claimed as a dependent during 2020
- Have a Social Security number for employment before your 2020 tax return is due
Impact #2: CARES Act & Retirement Accounts
The CARES Act allowed individuals with a 401(k), 403(b), 457(b), and Thrift Savings Plan to withdraw their funds without incurring the standard 10 percent tax rate from an early distribution.2 Instead, these withdrawals were considered coronavirus-related distributions or CRDs.
If you chose to take a withdrawal during 2020, your taxes may be impacted in a few ways:2
- They will count as income tax over a three- or one-year period, depending on your choice.
- They can be repaid before the end of the three-year period to receive a tax refund.
Also, be sure to let your tax or retirement advisor know if you took a CRD or QCD from your IRA or 401(k).
You should also be aware that any withdrawals in 2020 from your 401(k), 403(b), TSA, IRA, Roth IRA, or Retirement Annuity, as a Covid Related Distribution (CRD), may not show up as such on the 1099 form provided by the firm holding your account(s). This is because proper coding does not yet exist to depict a CRD. Therefore, it is critically important that you communicate to your tax advisor or retirement advisor handling your tax return, that you indeed took a CRD. This will prompt him or her to report the information on IRS Form 8915-E, and avoid you having to overpay taxes for 2020, counterproductive to the benefit of stretching the taxes over a three-year period.
Impact #3: Charitable Gift Deductions
Charitable deductions are often a great source of tax relief for filers. In 2020, the CARES Act provided some changes to charitable donations, allowing filers who take a standard deduction to benefit from charitable donations as well. Tax filers taking a standard deduction may now deduct $300 of cash donations on top of their standard deduction.3
As mentioned above pertaining to 1099s not receiving proper coding for a CRD, also holds true for a Qualified Charitable Distribution or QCDs. If you've made QCD from your IRA in 2020, be certain to report it as such or inform your tax or retirement advisor to help record it properly for you.
Impact #4: Unemployment Benefits
There are a variety of unemployment options for those that lost their jobs. All unemployment benefits are considered taxable income for 2020, but whether they are taxed will depend entirely on the type of program.4 Make sure to check with your unemployment benefits provider to determine whether or not you will need to pay taxes on your unemployment.
Impact #5: Tax Benefits for Business Owners
Business owners received two main benefits through the CARES Act, the Credit for Sick and Family Leave and the Employee Retention Credit.5 When filing taxes at the end of the year, consider whether the year’s changes allow you to benefit from other tax breaks beyond the CARES Act.
For example, many small business owners may have been forced to close down their physical location, opting for more remote work. Depending on the circumstances, these business owners may be able to claim their home as a home office, gaining a home office deduction on their 2020 taxes. Similarly, consider whether the changes created by 2020 make you eligible for other deductions and tax changes.
Here is an additional link from the IRS on Coronavirus Relief for Retirement Plans and IRAs on the topic. Or to learn more about misconceptions related to CRDs, see the following article by Ed Slott titled 4 Cares Act Misconceptions.
2020 was a challenging year, and understanding the support that’s available can help promote your own financial wellbeing this tax season. Whether you’re filing your taxes soon or still gathering your papers, remember to consider these potentially impactful changes. For more information or if you own large retirement accounts and would to speak to a retirement advisor who specializes in IRA and 401(k) rules for retirement, please contact us at California Retirement Advisors to learn more.
By Christian Cordoba
CERTIFIED FINANCIAL PLANNER™
Founder, California Retirement Advisors
This content is developed from sources believed to be providing accurate information, and provided by California Retirement Advisors. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. California Retirement Advisors, nor any of its members, are tax accountants or legal attorneys and do not provide tax or legal advice. For tax or legal advice, you should consult your tax or legal professional. #